Severn Trent Plc Annual Report and Accounts 2019 Highlights Contents

STRATEGIC REPORT £1,767.4m 93.37p What we do...... 02 Our business model...... 04 Our social purpose...... 06 Group turnover Dividend per share Chairman’s statement...... 16 2018: £1,696.4m1 2018: 86.55p Market and industry overview...... 18 Chief Executive’s review...... 21 How we are achieving our strategic objectives...... 24 Environment, Social and Governance – At a Glance...... 29 ODIs and KPIs...... 32 Regulated Water and Waste Water...... 34 Business Services...... 46 133.4p 145.8p Chief Financial Officer’s review...... 48 Risk management...... 54 Basic earnings per share Underlying basic Emerging risks...... 55 from continuing operations earnings per share2 Principal risks...... 56 2018: 101.8p1 2018: 120.5p1 Brexit statement...... 61 Viability statement...... 62

GOVERNANCE Chairman’s introduction to governance...... 64 Board of Directors...... 66 £563.3m £573.6m Executive Committee...... 68 Stakeholder and Shareholder engagement...... 73 Group profit before Group underlying profit Our company purpose and culture...... 75 interest and tax before interest and tax2 Board evaluation...... 77 Nominations Committee report...... 81 2018: £527.2m1 2018: £539.8m1 Audit Committee report...... 85 Treasury Committee report...... 93 Corporate Responsibility Committee report...... 94 Directors’ remuneration report...... 97 Directors’ report...... 123 1 Restated for the implementation of IFRS 15, see note 2 to the Group financial statements. Directors’ Responsibilities Statement...... 128 2 Alternative Performance Measures are defined in note 45 to the Group financial statements. GROUP FINANCIAL STATEMENTS Independent Auditor’s report to the members of Severn Trent Plc...... 129 Consolidated income statement...... 134 Consolidated statement of comprehensive income ...... 135 Consolidated statement of changes in equity...... 136 Consolidated balance sheet...... 137 Consolidated cash flow statement...... 138 Notes to Group financial statements...... 139

COMPANY FINANCIAL STATEMENTS Company statement of comprehensive income...... 195 Company statement of changes in equity...... 196 Company balance sheet...... 197 Notes to Company financial statements...... 198

OTHER INFORMATION Five year summary...... 202 Information for shareholders...... 203

Cautionary statement This document contains statements that are, or may be deemed to be, ‘forward-looking statements’ with respect to Severn Trent’s financial condition, results of operations and business and certain of Severn Trent’s plans and objectives with respect to these items. Forward-looking statements are sometimes, but not always, identified by their use of a date in the future or such words as ‘anticipates’, ‘aims’, ‘due’, ‘could’, ‘may’, ‘will’, ‘would’, ‘should’, ‘expects’, ‘believes’, ‘intends’, ‘plans’, ‘projects’, ‘potential’, ‘reasonably possible’, ‘targets’, ‘goal’ or ‘estimates’ and, in each case, their negative or other variations or comparable terminology. Any forward-looking statements in this document are based on Severn Trent’s current expectations and, by their very nature, forward-looking statements are inherently unpredictable, speculative and involve risk and uncertainty because they relate to events and depend on circumstances that may or may not occur in the future. Forward-looking statements are not guarantees of future performance and no assurances can be given that the forward-looking statements in this document will be realised. There are a number of factors, many of which are beyond Severn Trent’s control, that could cause actual results, performance and developments to differ materially from those expressed or implied by these forward-looking statements. These factors include, but are not limited to, changes in the economies and markets in which the Group operates; changes in the regulatory and competition frameworks in which the Group operates; the impact of legal or other proceedings against or which affect the Group; and changes in interest and exchange rates. All written or verbal forward-looking statements, made in this document or made subsequently, which are attributable to Severn Trent or any other member of the Group or persons acting on their behalf are expressly qualified in their entirety by the factors referred to above. Subject to compliance with applicable laws and regulations, Severn Trent does not intend to update these forward-looking statements and does not undertake any obligation to do so. Nothing in this document should be regarded as a profits forecast. This document is not an offer to sell, exchange or transfer any securities of Severn Trent Plc or any of its subsidiaries and is not soliciting an offer to purchase, exchange or transfer such securities in any jurisdiction. Securities may not be offered, sold or transferred in the US absent registration or an applicable exemption from the registration requirements of the US Securities Act of 1933 (as amended). > Strategic report Governance Group financial statements Company financial statements Other information

Welcome to the Severn Trent Annual Report 2019

Our purpose is to serve our communities and build a lasting water legacy. This drives our vision to be the most trusted water company by 2020, delivering an outstanding customer experience, best value service and environmental leadership.

This report highlights the progress we have made over the past year in achieving that vision through our strategic objectives and absolute focus on listening to and delivering value for all of our stakeholders. We’re committed to keeping your water flowing clearly and making your waste water clean again, so you can carry on enjoying this precious resource, for generations to come.

Severn Trent Plc Annual Report and Accounts 2019 01 Strategic report

What we do

We provide clean water and waste water services and develop renewable energy solutions through our businesses:

OUR VALUES REGULATED WATER AND WASTE WATER

Through our Company values Our Regulated Water and Waste Water we deliver the commitments businesses Severn Trent Water (excluding expected of a leading, socially Bioresources) and Hafren Dyfrdwy. responsible Company WE PUT OUR The primary activities we focus on • Wholesale operations and engineering CUSTOMERS FIRST • Household customer services £1,583.1m Turnover1 About us We are two of 11 regulated water and waste water businesses in England and WE ARE PASSIONATE Wales. We provide high quality services to more than 4.5 million households and £527.0m ABOUT WHAT WE DO businesses in the Midlands and Wales. Underlying profit before interest and tax1,2

WE ACT WITH INTEGRITY 2.0bn Litres of drinking water supplied each day WE PROTECT OUR ENVIRONMENT 5,680 Employees3

WE ARE INSPIRED Where we operate TO CREATE AN Our region stretches across the heart of the UK, from the Bristol Channel to the AWESOME COMPANY Humber, and from North and mid-Wales to the East Midlands.

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1. Severn Trent Water 98.1% 2. Hafren Dyfrdwy 1.9%

Severn Trent Plc Annual Report and Accounts 2019 03 Strategic report

Our business model

We provide clean water every time our Running an efficient customers turn on the tap and remove their waste water in an affordable, sustainable water business and reliable way.

Resources RESOURCES & Physical Natural Financial RELATIONSHIPS assets resources capital A resilient, well maintained Water from reservoirs, rivers We have a strong balance sheet, WE RELY ON network of clean water pipes and underground aquifers with gearing close to the and reservoirs, sewers are essential to support regulatory model. We are able to and pumping stations. Severn Trent’s operations access a range of capital markets and value creation. to fund future operations. We maintain over 49,000 km of clean water pipes and over We look after some of the Our gearing is 63%, one of the 92,000 km of sewer pipes. UK’s most impressive lowest in the sector. We have natural resources. committed undrawn facilities of £885 million.

THE WATER CYCLE Water is collected Water is cleaned Clean water We pay the Environment Our groundwater and is distributed Agency and Natural Resources surface water treatment Our network of pipes and our Wales for the water we works clean raw water enclosed storage reservoirs bring collect from reservoirs, rivers to the highest standards, a continuous supply of clean water and underground aquifers making it safe to drink. right to our customers’ taps. across our region.

OUR Providing clean water and cleaning waste water Food waste anaerobic is an ‘energy hungry’ process so we use waste digestion plants INVESTMENTS and renewables to help us power our operations. generating green energy IN RENEWABLE We are pleased to share that we now expect ENERGY to exceed our target to produce the equivalent of 50% of our own energy needs by 2020. PRODUCTION

GENERATING Physical Natural Financial capital & PRESERVING assets resources Our biggest year of capital We’ve improved biodiversity of Delivering returns for LONG TERM investment in over a decade. six hectares of Sites of Special our investors. Scientific Interest (‘SSSIs’) in VALUE 7.9% (2018: 6.2%) Good progress on our 2018/19. Birmingham Resilience Project. Dividend growth. We are on track to reach our Investment grade credit rating. Replaced 230 km of our water target of 75 hectares by 2020. network in 2018/19.

04 Severn Trent Plc Annual Report and Accounts 2019 > Strategic report Governance Group financial statements Company financial statements Other information

We do so through our regulated subsidiaries and draw upon our skills in water and waste treatment to provide similar services to other organisations through the our Business Services division.

Relationships

Our customers Our Our suppliers Our and communities people and partners regulators Our customers and communities We look to attract, develop Strong supplier relationships Our industry is regulated are at the heart of everything we do. and retain talented people from support our business by Ofwat and several We aim to anticipate and meet all backgrounds, and bring operations in line with our other regulators and changing customers’ and wider the next generation of water Modern Slavery commitments. public bodies. societal needs. experts into the industry. We work with over 2,400 direct We work with our We serve over 4.5 million We directly employ over 6,500 suppliers and contractors. regulators to shape our customers. people. Glassdoor reports industry. Our Severn that 74% of our people would Trent Plan was fast-tracked recommend us to a friend. by Ofwat.

Customers enjoy Waste water Waste water Water is recycled our services is collected is cleaned to the environment We serve 4.5 million Our network of sewers Waste water is carefully We pay the Environment businesses and households and pumping stations collect screened, filtered and treated Agency and Natural with a safe, reliable supply of waste water from homes in our sewage treatment Resources Wales annual water and collect waste water and businesses and take it works to meet stringent consent fees to return seven days a week, 365 days to our treatment works. environmental standards. the treated water to the a year. water system.

Solar Wind turbines Clean gas and green electricity from our sludge anaerobic digestion plants

Our customers Our Our suppliers Our and communities people and partners regulators Lowest bills in England for a Developing people from all Building sustainable relationships We stimulate regulatory decade (Severn Trent) and Wales backgrounds in line with our that provide mutual benefit. debates to improve services (Hafren Dyfrdwy). Social Mobility Programme. for customers across 258 suppliers signed up to the industry. We helped over 52,800 customers 31% of our graduates are from Sustainable Supply Chain through social tariffs and assistance a BAME background (2018: 27%). Charter (2018: 211). Launched the World Water schemes (2018: 51,700). Innovation Fund.

Severn Trent Plc Annual Report and Accounts 2019 05 Our social purpose > Strategic report Governance Group financial statements Company financial statements Other information

Severn Trent is proud to be a pathfinder for a new breed of long-term, socially purposeful companies working to improve our country’s infrastructure (the systems and services the country needs to run effectively).

The idea is simple. We combine a We have made significant progress The pledges state that by 2030, strong public service ethos with the over the last 25 years, creating a the sector as a whole will: benefits of private investment and solid foundation for achieving our • have eliminated water poverty, independent leadership to deliver commitments over the next 25 years. meaning no one should have world class water services. We will achieve this through a to spend more than 5% of their combination of careful management Our social purpose, to create income on water; and sensible long-term investment. long-term value through serving • be operationally carbon neutral, the needs of society, is at the We have played a leading role meaning our operations do not heart of everything we do. in developing a ‘public interest contribute to an increase in Our commitment is this – every commitment’ that sets out a greenhouse gases which increase decision we make is based on series of five pledges for all water climate change; providing world-class water companies in England. All water services at a fair price. We aim to companies have also committed to • have tripled the rate at which make the most of our contribution signing the Social Mobility Pledge leaks are reduced; and to society as a whole and improve (a pledge made by organisations • have prevented the equivalent the environment. to be involved with schools, provide of four billion plastic bottles work experience and recruit people Our social purpose is focused on ending up as waste (through our from disadvantaged backgrounds) what our customers want to see ‘Refill scheme’). – an important step for the sector from a forward-thinking company. as a whole. Our own commitments go even We are certain our efforts will further than these pledges. meet our customers’ needs now and in the future. The next pages highlight what our social purpose is achieving for customers, the environment and society as a whole as well as our colleagues and investors.

Severn Trent Plc Annual Report and Accounts 2019 07 One moment of inspiration; a lifetime of water saving > Strategic report Governance Group financial statements Company financial statements Other information

Our social purpose for Our Customers

Our social purpose is what drives our ambition to provide world-class services at fair prices.

We are very proud of our In our business plan for 2020-2025 recent achievements, including we commit to reducing bills by the following: another 5%, investing in improving more than 2,000 kilometres (km) • We are industry leaders on of our local rivers, and almost delivering on Outcome Delivery doubling support we provide to Incentives (‘ODIs’) (the measures vulnerable customers. that are most important to customers). Our business plan, which is built on our social purpose, is one of the • Having a customer-satisfaction very few to receive fast-track status rating of 85%. from Ofwat, a firm endorsement • Our average combined bills of our customer and community – for water and waste water focused approach. services – remain the lowest

in the UK. • Being leaders in encouraging all water companies to make a number of clear commitments that are in the public interest.

32,000 of our customers had a direct say in development of our AMP7 business plans and a further 1.9 million views were considered in its creation. Our absolute priority is to improve services for all of our customers in areas that matter most to them.

Severn Trent Plc Annual Report and Accounts 2019 09 Custodians of a precious resource enjoyed by us all > Strategic report Governance Group financial statements Company financial statements Other information

Our social purpose for The environment and wider society

Our social purpose means maximising the benefits to the environment and wider society. And, as a custodian, we look after your water.

Our commitments include • Supporting charities like WaterAid the following: (which we helped to set up) working in poorer countries. • Planting the equivalent of one tree for every three households • Offering every primary school we serve by 2030, to help in our region a visit from our reduce flooding and improve Wonderful Water Tour – an water quality. educational roadshow to inspire tomorrow’s generation. • Being operationally carbon neutral by 2030. We are determined to do even more. That is why we have created • Making sure our facilities are free Our people make an amazing contribution the World Water Innovation Fund. of single-use plastic by 2020 and, to the communities they work and live in We’ve joined forces with like-minded through our dedicated volunteering scheme, by 2030, helping to prevent the companies across the world to Community Champions, working alongside equivalent of four billion plastic partners such as the Canal and River Trust find new ways of working – pooling bottles ending up as waste. to improve riverside environments. resources and ideas to develop • Signing the Social Mobility and speed up the development Pledge and recruiting people of new technology. Our £5 million from disadvantaged backgrounds investment in the fund will make across our region, so that we can a real difference to people’s lives provide opportunities to everyone. across the world and we’re excited about what we can achieve by • Encouraging every employee working together. to spend at least two days a year of company time volunteering An example would be working in their local community. with leading researchers and manufacturers to develop robotic equipment that could actively look for, find and even repair leaks inside pipes.

Severn Trent Plc Annual Report and Accounts 2019 11 Our expert minds delivering investments for the future > Strategic report Governance Group financial statements Company financial statements Other information

Our social purpose for Our Colleagues

We believe that an expert, highly motivated workforce is vital for providing world-class services at fair prices. And we also believe that a true measure of a company is how it treats its workforce.

Our goals are to: We will achieve these goals by: • Help all our colleagues • Investing in the best, most to succeed. relevant apprentice and graduate recruitment schemes in the • Fairly reward regions we serve. people’s contributions. • Setting up a £10 million technical • Be a company everyone Academy in Coventry to help us is inspired to work for. prepare future generations for rewarding careers. • Encouraging everyone to be themselves at work, recognising the widest possible range of talents. • Encouraging physical and mental well-being. • Paying fair wages, with a bonus scheme for all employees linked to our performance for customers. As part of our continued focus on providing • Giving all employees an a more inclusive working environment opportunity to be part- for all, we launched our LGBT+ Ally owners of the Company Programme this year – an opportunity for all employees to challenge behaviour and (an amazing 70% take part actively support their LGBT+ colleagues. in our Sharesave scheme).

Severn Trent Plc Annual Report and Accounts 2019 13 Decades of sustainable investment positive effects for all > Strategic report Governance Group financial statements Company financial statements Other information

Our social purpose for Our Investors

A business that wants to be financially sustainable over the long-term first needs to be socially and environmentally sustainable.

We believe focusing on social We believe this long-term, purpose is the right thing to do, approach will ultimately provide and we also believe it improves our sustainable returns for like- long-term financial sustainability. minded investors whose approach This in turn helps us provide to investing matches our beliefs. more for customers, society and An added benefit of our social the environment. purpose is our commitment to the highest standards of governance. Being open and honest in the way we run our company.

Our commitment to the Social Mobility Pledge will help people from disadvantaged backgrounds across our region become part of the Severn Trent family and succeed within the business.

Severn Trent Plc Annual Report and Accounts 2019 15 Strategic report

Chairman’s statement

Fulfilling our role in society

This year has seen our company successfully achieve a series of important milestones, culminating in our Severn Trent Water business plan for the five years from 2020 being fast-tracked by Ofwat. Our operational performance is discussed in detail in our Chief Executive’s review. Here, I want to take the opportunity to look at the bigger picture by highlighting the positive difference we have made for our customers and underline our commitment to being a force for good in the communities we serve. Our purpose is to serve our communities, build a lasting legacy and be recognised as the most trusted water company – and during the year we were delighted to see this commitment recognised when we were named as a pathfinder with the Purposeful Company Task Force, an initiative that seeks to transform British business with purposeful companies that are committed to creating long-term value through serving the needs of society. We were the only utility to receive this honour, and we’re continuing our work with Will Hutton, Clare Chapman and like-minded companies to explore how we can best use social purpose as a tool to promote trust between business and society. This understanding and recognition of social purpose has never been more important – our purpose connects us with our customers and communities, inspires our people, attracts investors and reinforces that in the long-term we all share the same interests. We believe that transforming our services and driving growth will lead to mutual benefit for all, with performance that delivers It has never been more important that we focus on our purpose benefits to one group also delivering for in society. This underpins everything that we do. Not only in the others. The interest of our stakeholders context of our shareholders but also in full consideration of our are often interlinked, with many employees, communities and other stakeholders. This isn’t only shareholders also being our customers, a focus for us because we are a good company, but because it employees and pensioners. is synonymous with the long-term success of Severn Trent.” Andrew Duff Chairman

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I am pleased to see that in its emerging It is important that the makeup of our Your Board strategy, Ofwat sees the importance of workforce is representative of the encouraging companies to deliver public communities we serve. I am pleased to There were no changes to Board value and how they can, for example, give report that in respect of ethnic diversity, membership during the year. recognition to companies to own their 8.7% of our workforce come from Black, We continued to work well together as public purpose. Asian and Minority Ethnic (‘BAME’) a team, with the appropriate balance of backgrounds. Additionally, 31% of our Executive and Non-Executive Directors. Long-term achievements graduates and 12% of our apprentices The Board was fully engaged throughout the PR19 process; and worked tirelessly Water services in England and Wales come from BAME backgrounds, with our senior team to create a plan have been transformed for the better significantly above industry averages. that will bring real improvements to over the last 25 years – and we have We’ve also invested in initiatives to help customer service while also keeping bills played a major role in this change, provide employment opportunities to the lowest in England and Wales. investing £22 billion in today’s money in people from disadvantaged backgrounds infrastructure improvements over the in our region. We are also the highest It is a real privilege to serve as Chairman last quarter of a century. We are proud of ranked utility in the Hampton-Alexander of Severn Trent and it has been a the part that our continuous investment Review, which measures gender diversity. pleasure to oversee the Company’s has played in providing better services progress over the last nine years. As we to our customers, greater opportunities Sharing the rewards prepare to implement our new business for communities and our people and a Under our industry’s regulatory plan, following selection as one of only cleaner environment for all. framework, high levels of customer three companies awarded fast-track status by Ofwat, I believe this is the The future of the water industry service create financial rewards right moment to step down and allow continues to be the subject of significant through customer ODI outperformance. a new Chair to lead the Board into this debate. At Severn Trent, our policy is This means that we are able to share the important next phase for Severn Trent. to only comment on political issues benefits of our work with all stakeholders These plans are in the early stages and that materially affect our customers. when we perform well. Over the course it is planned to formally announce my We believe that renationalisation is of the AMP, we will reinvest £220 million successor in due course. You can read one such issue, and that the interests generated by our outperformance back more on this process on page 84. of all stakeholders – including UK into our business, including vulnerable customers, water quality and security. taxpayers – are best served by the Outlook industry remaining privatised whilst Additionally, our new community dividend operating within a clear and robust will set aside 1% of company profits for Ofwat’s fast-tracking of our business regulatory framework. the benefit of community projects. plan has, in many ways, endorsed our We have delivered strong financial strategy, structure and business model, Our people make the difference performance this year, with Group and further fuelled our commitment to customer service. I look forward to the Our people take very seriously the turnover from continuing operations of year ahead with confidence, knowing responsibility that comes with providing £1,767.4 million, an increase of 4.2%. that the talent of our people, the financial an essential service that touches Underlying earnings per share was strength of our business, and our the lives of millions. Their passion 145.8 pence, up 21.0% from the prior commitment to good governance will and commitment shines through in year and basic earnings per share help us to fulfil our potential as a socially everything they do – meeting customers, was 133.4 pence, up 31.0% from the responsible business providing a high solving problems and working tirelessly prior year. quality, essential public service. to keep our product flowing at the turn We are therefore proposing a final of a tap, 24 hours a day, seven days a dividend of 56.02 pence per share to week – and on behalf of the Board I thank be paid on 19 July 2019, taking the total them unreservedly. dividend for the year to 93.37 pence per share. Andrew Duff Chairman

93.37p £1,767.4m £563.3m Dividend per share Group turnover Group profit before interest and tax 2018: 86.55p 2018: £1,696.4m¹ 2018: £527.2m¹

1 Restated for the implementation of IFRS 15, see note 2 a) of the Group financial statements.

Severn Trent Plc Annual Report and Accounts 2019 17 Strategic report

Market and industry overview

The history of the water sector We continue to respond to these challenges and believe the actions we Our context Water services in England and Wales are taking now can have a significant have been transformed since the early impact on our ability to be successful in 1900s. Since privatisation in 1989, the these areas in the long-term. You can and peers sector has invested £130 billion to deliver read more in our social purpose section improvements in reliability and quality on page 6. of service and it is estimated that our sector has improved efficiency by around In April 2019 we were delighted to 67%. Drinking water is cleaner, supply launch the World Water Innovation Fund, is more reliable, sewer flooding is much bringing together the most forward less frequent and rivers are in a better thinking water companies across Europe, state of health than at any point since the the Americas and Australia. The fund industrial revolution. aims to find, develop and accelerate ground-breaking technologies that will We’re very proud of our industry’s make a real difference across the world. achievements. The water sector in The first area of focus will be leakage England and Wales was recently ranked – reflecting the importance the sector joint first for providing better outcomes places on this sector-wide issue. for customers compared to other European nations. In five of the six key We’re also taking a national perspective measures of performance – including by working with other water companies A total of 17 regional businesses water quality, customer service and and partners in the UK to explore supply water services to over costs – it is either the top performer or ways in which water can be traded 50 million household and the most improved. Analysis by Water UK across water company boundaries. non-household customers in states that around 90% of customers are Currently only 4% of water supplies are England and Wales. Eleven of these, satisfied with their water service and that transferred between water companies. including Severn Trent Water Limited 86% trust their water company. We are working hard on planning an and Hafren Dyfrdwy Cyfyngedig, interconnector to move water from the provide waste water services, the The future of the water sector wettest parts of England and Wales to remaining six provide water only. the driest, for the benefit of customers Our planning horizon goes beyond 25 across the sector. Plans for our new years and we believe that a business interconnector are described on page 41. that wants to be financially sustainable over the long-term first needs to This has been a pivotal year in our be socially and environmentally regulatory cycle. Our regulatory 17 sustainable. It also needs customers, framework continues to evolve and in regulators and investors to share its the next five year period we will see the Regional businesses long-term vision for a brighter future opening of the bioresources market, for the sector. Despite our sector’s enhanced customer Outcome Delivery significant achievements to date, there Incentives (‘ODIs’) and a new measure remains much to do. Some of the key of customer satisfaction, C-MeX. challenges facing the water sector We welcome this change, as C-MeX will 50 million include climate change, population ensure that the totality of the experience Number of household and growth and developing the trust of of all our customers is represented. non-household customers served stakeholders through continuing to behave responsibly. £130 billion Total investment in the industry since privatisation

18 Severn Trent Plc Annual Report and Accounts 2019 > Strategic report Governance Group financial statements Company financial statements Other information

Our regulatory framework As a provider of an essential public service we work within a wide-ranging regulatory framework, with strategic and policy direction provided by the Department for the Environment, Food and Rural Affairs (‘Defra’) in England and the Welsh Government in Wales. Ofwat is the industry’s economic regulator and sets limits on the prices we can charge our customers over five- year Asset Management Plan (‘AMP’) cycles. This financial year was the fourth of AMP6, which runs from April 2015 to March 2020. We also work closely with a variety of other regulators and public bodies, including: • The Drinking Water Inspectorate (‘DWI’) independently checks that A key year in our regulatory cycle At the same time we’ll deliver our water supplies in England and Wales largest bill reductions in a decade. are safe and that drinking water quality Every five years, Ofwat reviews the By challenging ourselves to be 13% more is acceptable to consumers. Its work prices we charge for the forthcoming efficient in the way we invest, we will includes assuring water quality, five year period. They also review our be able to invest more to improve our ensuring companies make the changes plan setting out how we intend to deliver services to customers whilst delivering a necessary to improve, and developing for customers and the environment. bill reduction for customers of 5% in real new regulations to further improve In September 2018, we submitted our terms over the next AMP, maintaining the water quality. Severn Trent Water and Hafren Dyfrdwy lowest bills in England over AMP7. business plans for AMP7, which run • The Consumer Council for Water from 2020-2025. We are proud of our work as a pathfinder (‘CCW’) speaks on behalf of water purposeful company and are pleased consumers in England and Wales. Severn Trent Water’s plan this was recognised by Ofwat who It provides advice to consumers and commended us on our ‘pathfinding Our Severn Trent Water plan was shaped takes up complaints on their behalf. social purpose company’ thinking by the largest engagement exercise and our initiative with the Purposeful • The Environment Agency (‘EA’) allows we have ever coordinated, consulting Company Task Force. We believe that if us to collect water from reservoirs, with 32,000 customers and considering we’re united by a clear social purpose, rivers and aquifers and return it to the a further 1.9 million customer views, we’ll deliver better outcomes for all environment after it’s been used by our and was the outcome of over 24 months our stakeholders – our customers, our customers and treated by us. of development. As part of this we colleagues, our investors, the society established new methods of listening to • Natural Resources Wales is the we live in, and the environment that we our customers, such as our online ‘Tap environmental regulator in Wales. depend on. It oversees how the country’s natural Chat’, which enabled customers to give resources are maintained, improved us rapid feedback on our proposals. We were delighted that Severn Trent Water was one of only three companies and used, both now and in the future. We are committed to continued to be awarded fast-track status by Ofwat. improvements in core areas of our • Natural England advises the We see this as a firm endorsement of our service. Our plan includes a series Government on the natural high standards of governance and focus of service innovations to reflect our environment in England and helps on the sustainability of our business customers’ changing needs, and a to protect nature and the landscape, and our customer and community package of new commitments that aim especially for plant and animal life in focused approach. both fresh water and the sea. to make a bigger contribution to the communities we serve, supported by • The Health and Safety Executive our new community dividend. We will helps us to manage risk to ensure the also invest over £6 billion over the health and safety of our employees, next five years, ensuring we continue customers and visitors is preserved. to build a lasting water legacy for future generations.

Severn Trent Plc Annual Report and Accounts 2019 19 Strategic report

Market and industry overview continued

Ofwat has recently published its And in Hafren Dyfrdwy… Working in a changing emerging strategy which sets out three macro environment main aspirations that are emerging In July 2018 we launched Hafren Dyfrdwy for the sector – delivering every day – our new water company dedicated The macro environment is changing excellence, stewardship for the future solely to customers in Wales, bringing rapidly and there are three areas which and value for individuals and society. together all the Welsh customers we are particularly focused on. We are very supporting of Ofwat’s previously served by Severn Trent Water and Dee Valley Water. The Chairman comments on the debate emerging thoughts and in particular its around the future of the water industry in thoughts around encouraging companies Our Hafren Dyfrdwy business plan was his statement on page 16. to deliver public value. classified as ‘significant scrutiny’ by Ofwat. This was not unexpected given that The current uncertainty around Achieving fast-track status means Brexit has had implications for water we have clarity on the challenges Hafren Dyfrdwy was a new company and therefore has a lack of historical data. companies that extend beyond financial and opportunities ahead. With our matters. An area of focus over the last plan now agreed and commitments We were pleased that Ofwat’s initial 12 months has been to put plans in set a full 14 months before the start assessment recognised the progress made place to ensure that we can maintain of the next AMP, we are accelerating on our cost base over the last two years access to sufficient quantities of our preparations. In March 2019, and the certainty provided by our Totex imported chemicals for our treatment we announced details of the first plan being approved. We have continued works in the event of a ‘no-deal’ Brexit. key contractors we intend to use to to work constructively with Ofwat on Additional detail can be found on page 61. deliver our c.£2 billion investment the resubmission of the Hafren Dyfrdwy in construction projects for AMP7. plan to deliver the right outcome for our Population growth, driving increased water demand, and climate change, are We received our Severn Trent Water draft Welsh customers. The Hafren Dyfrdwy plan was resubmitted in March 2019. two of the biggest challenges facing our determination in April 2019 and we’re industry. We have recently committed to continuing to work constructively with What’s next? the five pledges made by all companies Ofwat on our response. in our sector which respond to these Hafren Dyfrdwy draft determination challenges. More information can be – July 2019 found on page 7. Final Determinations for all companies – December 2019

How our market environment influences our five strategic priorities

Embedding Driving Investing Changing the Creating an customers operational responsibly market for awesome place at the heart excellence and for sustainable the better to work of all we do continuous growth innovation

We’ll continue Innovation helps We invest to make We work We can only to anticipate and us to deliver the sure we continue constructively succeed if we have to meet changing services customers to benefit from with regulators, the support of customers’ and need and keep a resilient, well- helping to prepare inspired, talented, wider societal needs bills affordable maintained network the industry for diverse and that meets the the opportunities engaged people demands of a growing and challenges population and a of the future changing climate

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20 Severn Trent Plc Annual Report and Accounts 2019 > Strategic report Governance Group financial statements Company financial statements Chief Executive’s review Other information

Delivering value for stakeholders

This has been a pivotal year for Severn Trent and one I’m incredibly proud of. We put together the most ambitious business plan in our history and I’m personally delighted we were given fast-track status for the first time, showing Ofwat shares our belief that customers will get the best possible outcome from our plan for the next AMP. It’s a great testament to everyone who was involved in pulling the plan together, especially to our customers who helped us create the proposals. We’re proud of our financial and operational performance. We demonstrated resilience and flexibility in our network throughout the prolonged hot, dry weather over the summer – which saw a 22% increase in demand for water from our customers at peak times. This intense activity would not have been possible without the hard work and dedication of our people across the business. And I could not be more proud of the way they responded, without us having to impose hosepipe bans or other restrictions. You can read more about our operational performance in the performance review and our financial performance in James’ financial review. I’m also delighted that Ofwat commended us for our ‘pathfinding social purpose company’ thinking and our initiative with the Purposeful Company Task Force. In being united by a clear social purpose, we’ll deliver better outcomes and build trust between all of our stakeholders. So, in this year’s CEO review, I want to share how our plan will deliver for our customers, the environment and wider We are the custodians of a precious resource – water is society, our people and those investors vital to everyone across the world. As we build the next phase supporting us on our long-term journey. of our journey to deliver for our customers, shareholders, employees and the environment we pledge to be a force for good in the communities we serve and, in doing so, create value for all our stakeholders.” Liv Garfield Chief Executive

Severn Trent Plc Annual Report and Accounts 2019 21 Strategic report

Chief Executive’s review continued

Our customers: at the heart As I’ve already mentioned, our social Major projects such as this require of our plan purpose ethos aims to build trust significant investment. And the last year between our stakeholders and three has seen the largest capital spend in 32,000 customers had a direct say in of the things I’m personally most our history. These schemes will deliver development of our Severn Trent Water proud of are: a better service and Totex efficiencies plan and a further 1.9 million views for our customers – ensuring a reliable – Our new community dividend, through helped shape its creation. Our absolute supply of water for generations to come. which we will invest 1% of our profits in priority is to improve services for all We’ve made excellent progress on the community projects – a really exciting of our customers in areas that matter Birmingham Resilience Project, which is opportunity to make a positive impact most to them. We work night and day to the biggest water enhancement project in our region. create a service that’s so good that our in the sector in AMP6, with 25km of customers would still choose us, if they – Our commitment to the Social the pipeline already installed. This is had the choice. So, our plan aims to Mobility Pledge – helping people from on track for completion by the end of deliver just that. disadvantaged backgrounds across our the year. region become part of the Severn Trent Affordability is right at the top of our Our AMP7 investment plans are well family and succeed within our business. agenda and we’ll be reducing bills by underway, and we’ve announced the 5% in real terms. And we already have – We’re getting even more involved in the first contractors we intend to use to the lowest bills in England and Wales. communities in which we live and work, deliver our c.£2 billion investment in We’ll be investing £6.6 billion over for example through our Wonderful construction projects over the next the next five years and helping nearly Water Tour – an innovative educational AMP. And we’re also creating a new 50% more of our customers who are roadshow that every primary school in specialist design team. By investing in genuinely struggling to pay their bills. the Midlands will have the chance to the professional expertise of our people Improving our environment is a key take part in. we will further improve the reliability and availability of our assets. area of focus for us and our plan is not We’re committed to creating a more just to protect the environment, it’s resilient water sector in England and Following year end, we launched to significantly improve it. We already Wales. Key to this is ensuring that water our World Water Innovation Fund in work hard to make sure that the impact can be traded across water company April. Joining forces with like-minded we have is as positive as possible and boundaries. So, we are working hard on companies across the globe to find new we’ll be partnering with an extra 2,000 feasibility planning for an interconnector ways of working – pooling resources farmers to improve the quality of our raw to move water from the wettest parts of and ideas to develop and accelerate new water supplies. You’ll find more on our England and Wales to the driest, for the technologies. Our £5 million investment great performance in this area within benefit of customers across the entire in the Fund will make a real difference to our performance review section. sector. Collaborating with other water people’s lives across the world and I’m companies is a great example of how really excited about what we can achieve the sector is focused on customers in by working together. The initial focus all parts of the country, not just in their will be on leakage and we have already own regions. invested ourselves in innovative ways of finding leaks faster, and fixing them more efficiently, and I’m pleased that we have £563.3m 7.9% started to see some encouraging results. Group PBIT Dividend increase 2018: £527.2m¹ 2018: 6.2% £1,767.4m £4.5m Group turnover Net ODI penalty3 2018: £1,696.4m¹ 2018: Net reward of £71.6m4 £573.6m Underlying Group PBIT² 2018: £539.8m¹

1 Restated for the implementation of IFRS 15 see note 2 of the Group financial statements. 2 Alternative Performance Measures are defined in note 45 of the Group financial statements. 3 Outcome Delivery Incentive (‘ODI’) quoted pre-tax in 2012/13 prices. 4 Restated to reflect Ofwat’s decision on Supply Interruptions in their Final Determination of in-period ODIs for 2018.

22 Severn Trent Plc Annual Report and Accounts 2019 > Strategic report Governance Group financial statements Company financial statements Other information

Our people: delivering our Our environment: investing Long-term sustainability for plan for customers, every day for the benefit of all long-term investors of the year We look after some of the UK’s most We believe that a business driven by Our people work tirelessly to keep impressive natural resources. We’ve social purpose and sustainability aligns wonderful water flowing and treating improved the biodiversity of a further with the interests of investors over waste for our customers everyday of six hectares of Sites of Special Scientific the long-term. Delivering against the the year. So they can achieve their best, Interest and we’re on track to reach our customer, social, environmental and we work hard to be the best employer target of 75 hectares by 2020. We’re financial commitments we have made we can be. We’re constantly looking proud of our environmental performance, for the next five years will yield financial for new and better ways to help our with rivers in the UK, including the rivers outperformance that can be shared with people do their job more effectively, Severn, Trent and Dee in our region, all stakeholders including investors. being cleaner than at any time since the fulfil their potential and make them Looking to the longer term, we will industrial revolution. feel valued. In doing so, we improve the continue to invest in our asset base to service we deliver to our customers. Water scarcity remains a huge challenge meet the emerging environmental and So, we’re continuing our investment for the water industry across the world societal needs of the region we serve. in training – through our Severn Trent – so it’s vital that our customers know Working with like-minded organisations Academy. When completed this will how to use water wisely. Our Wonderful to tackle the big issues the industry faces train our engineers and leaders of the Water Tour aims to inspire a generation will ultimately deliver a more sustainable future, giving our people opportunities to stay hydrated while reducing water long-term investment proposition with for growth, development and more consumption and being more careful attractive returns for those that choose rewarding careers. about what they put down the loo and to come with us on our journey. Over 90% of our people took part in our sink. And the World Water Innovation annual employee survey this year, giving Fund will be exploring innovative ways to Looking forward us great feedback on what we’re doing reduce water scarcity on a global scale. We are driven by our social purpose, well and where they expect us to do I am delighted that we increased our and believe this is also in the better. We’re pleased that we were rated energy generation to the equivalent of long-term interests of our investors. among the Top 50 Best Places to Work 43% of the energy we consumed this To be a financially sustainable business again, and that 74% of our workforce year. We continue to invest heavily in we first need to be socially and would recommend us to a friend. renewable energy – and we welcomed environmentally sustainable. I’d like to thank our people for their Agrivert to the Severn Trent family And in delivering for our customers, amazing contribution to the communities during the year – adding 105GwH our investors will still be able to make they work and live in. Over 1,900 days per annum to our energy generation attractive, appropriate returns. were dedicated to our volunteering capacity. This reflects our commitment scheme, Community Champions. to become a sector leader in sustainable With our plan agreed and performance We worked alongside partners such as resource efficiency, and to drive down commitments set well before the start the Canal and River Trust to improve carbon emissions. The Board thoroughly of the next AMP – this is just the start 34 km of riverside environment, and in enjoyed their recent site visit, observing of the next five-year journey for us as AMP7, we’re expanding the volunteering anaerobic digestion processes, and a company. Our teams now have to programme to include working with they were hugely impressed by the deliver everything we’ve promised, Heart of England Forest to create and engineering capability and expertise to set us up for continued success in protect a huge broadleaf forest across of our people. AMP7. Whether that’s keeping bills the Midlands. low, improving our services, or having a really positive societal impact on our communities. It’s going to be a real challenge and it’s one we’re confident we can meet.

Liv Garfield Chief Executive

The Board visited our Agrivert site during the year. Read more on page 80.

Severn Trent Plc Annual Report and Accounts 2019 23 Strategic report

How we are achieving our strategic objectives

What we said we would do in 2018/19 • We’ve made a number of changes to our operating model, including • Build greater capability in to the design and operation of our incident management, focusing Network Control room and increasing on continuous improvement. availability of real-time data. • Develop the use of the ‘Wonderful on For example, we’ve used 100 high Tap’ brand to increase the focus of all pressure loggers across our network colleagues on enhancing the quality to identify pressure transients and of our products and customer service, modify the system control on booster and increase engagement on the pumps to minimise them. things that matter most to them. • We applied the learnings from the • Deliver on the things that matter most Freeze Thaw event in March 2018 Embed to our customers as measured in during the prolonged hot, dry weather customer ODIs. this year– which saw a 22% increase in customers demand for water from our customers • Provide a service that is affordable at peak times. We demonstrated for all and support our financially resilience and flexibility in our network at the heart vulnerable customers by assisting during this time and focused on 50,000 customers with their bills. prioritising resources to meet the of all we do Our progress in 2018/19 additional demand and minimising the impact on our customers. • We’ve continued to offer a range of • We’ve increased our customer support schemes to help our customers engagement including running our first struggling to pay their bills. Our aim is to ever TV ad to promote water efficiency. support at least 50,000 customers each year while continuing to evolve our offers Areas of focus for 2019/20 of support and our priority services What do we register. We’re already significantly • Providing a service that is affordable mean by this? expanding the scope and offers of for all and support our financially support available. Alongside this, our vulnerable customers. Big Difference scheme continues to We’ll improve the way • Maintaining the lowest bills in England offer up to 90% discounts for customers (Severn Trent Water) and Wales in which customers that are struggling to pay their bills. (Hafren Dyfrdwy). engage with us through • We’ve maintained our position delivering • Delivering on the things that matter improved insight and the lowest bills in England (Severn Trent most to our customers as measured by Water) and Wales (Hafren Dyfrdwy). customer ODIs. understanding of what’s Based on our PR19 Business Plans, we are set to continue this position to 2025. • Further improving our incident important to them. management capability to ensure we • We’ve delivered another good can maintain an uninterrupted supply year on customer ODIs, delivering of clean water to our customers. outperformance equivalent to £91 million. And we agreed with Ofwat to uncap ODIs on our waste water measures. This will help us deliver even more progress this AMP on the areas that matter most to our customers.

READ MORE ON OUR ODIs AND KPIs ON PAGE 32

READ MORE IN OUR PERFORMANCE REVIEW ON PAGE 34

24 Severn Trent Plc Annual Report and Accounts 2019 > Strategic report Governance Group financial statements Company financial statements Other information

What we said we would do in 2018/19 • We remain in the targeted assurance category for Severn Trent Water this • Deliver our plans to be Upper Quartile year, with Ofwat assessing over 80% for Retail, Water and Waste. of measures as ‘meets expectations’. • Continue to provide All measures were assessed as ‘minor environmental leadership. amends’ or above meaning that Ofwat has no major concerns with the way in • Make further progress on the quality which we report our performance to of our water as measured by the DWI’s customers and stakeholders. Compliance Risk Index. • We’ve continued to make strong • Regain self-assured status for our progress, as a result of our additional Drive English business. investment made earlier in AMP6. Our progress in 2018/19 We are working really hard on further improvements in this key area. operational • Our performance across Waste – service and cost efficiency – remains Areas of focus for 2019/20 excellence and sector leading. And our PR19 plan • Retaining our strong performance on placed us in the upper quartile for Waste, while making improvements on Waste. In fact, Ofwat have asked us Retail and Water service. continuous to share best practice with other companies so that customers across • Delivering our environmental England and Wales can benefit from commitments including on the Water innovation improvements on external sewer Framework Directive and biodiversity. flooding performance. In Water, we’ve • Retain a minimum of targeted delivered substantial second half assurance and all measures assessed improvements, giving us confidence for as ‘minor amends’ or above. 2019/20 and beyond. We are continuing What do we to make improvements in Retail. • Sharing best practice with other mean by this? companies so all customers across • We’ve successfully delivered two key England and Wales can benefit from environmental commitments – overall the improvements we’ve delivered in We’ll build a smarter environmental performance and our region on external sewer flooding. catchment management, enhancing water and waste water the quality of our raw product and network, develop our reducing the level of treatment. We’ve also made good progress on our Water business intelligence Framework Directive and biodiversity and simplify our cross commitments. Unfortunately we’ve seen an increase in serious pollution business processes. incidents this year and we’re putting extra resources in place to make improvements in this area.

READ MORE ON OUR ODIs AND KPIs ON PAGE 32

READ MORE IN OUR PERFORMANCE REVIEW ON PAGE 34

Severn Trent Plc Annual Report and Accounts 2019 25 Strategic report

How we are achieving our strategic objectives continued

What we said we would do in 2018/19 We have chosen to reinvest £120 million of this efficiency saving • Deliver fully on our PR14 investment into security, water quality and commitments, being confident that vulnerable customers, and a further we are able to deliver against our £100 million in smart data. current plans and make appropriate investments for the future. • We proved financially resilient, during the prolonged hot, dry summer – and • Achieve material improvements in were able to absorb the increased some of our key Enterprise Risk costs associated with pumping up to Management (‘ERM’) risks. an extra 400 million litres per day and • Drive a focus on efficiency across 24/7 use of a fleet of water tankers to Invest all business areas including top up service reservoirs. central functions to support • We launched our World Water frontline investment. Innovation Fund in April 2019, joining responsibly • Continue to embed innovation across with like-minded companies across the Company, making it part of every Europe, the Americas and Australia, for sustainable team’s way of working. to find new ways of working, and make a huge difference to our sector. Our progress in 2018/19 growth • Our cross-team communities of • We’ve invested over £1 billion this year practice continue to develop novel to ensure we have a resilient network approaches and share best practice and asset base capable of delivering with the aim of delivering targets in our services now and into the future. 2019/20 and meeting the 15% leakage This includes two key investment challenge in AMP7. commitments where customers are protected by customer ODIs – Areas of focus for 2019/20 What do we Birmingham Resilience and the Water • Promoting a more sustainable way of mean by this? Framework Directive. working which looks beyond traditional • We’ve made significant progress on end-of-pipe solutions (including our We’ll develop an addressing property compliance risks, partnership working and sustainable sewage treatment commitments). effective strategy and continue to make improvements to achieve our target position by the end of • Developing the World Water Innovation which optimises our the AMP. However our underperformance Fund to help find new ways of working regulated asset base, on key risks means our performance and to leave a lasting water legacy for on ERM risks has remained static, future generations. whilst creating new see Principal Risks section on page 56. • Continuing to progress our growth opportunities • Over AMP6, we have locked in understanding of the impact of for the future. £460 million of efficiency. We’ve climate change on our long-term achieved this through a range of service delivery, using the UK Climate initiatives including the roll-out of Projections 2018 published by the standardised products, embracing Met Office. ‘plug and play’ construction, and using smart programming to best utilise assets and resources.

READ MORE ON OUR ODIs AND KPIs ON PAGE 32

READ MORE IN OUR PERFORMANCE REVIEW ON PAGE 34

26 Severn Trent Plc Annual Report and Accounts 2019 > Strategic report Governance Group financial statements Company financial statements Other information

What we said we would do in 2018/19 Areas of focus for 2019/20 • Produce compelling cases for • Working progressively with Ofwat investment at PR19 that enable strong to finalise the PR19 outcome. RCV growth over AMP7 and AMP8. • Delivering our ambition of 50% • Deliver phase two of the energy and self-generation. renewables strategy to achieve 50% • Progressing the development self-generation. of regional water trading • Build a sector leading approach solutions, including the North to bioresources. to South interconnector. • Finalise the creation of Hafren Dyfrdwy Change and deliver a great first year. the market Our progress in 2018/19 • We’ve received fast-track approval for our PR19 business plan for Severn for the better Trent Water. The Totex allowance drives strong RCV growth, with Ofwat’s modelled cost allowance having reflecting many of the areas we had highlighted for improvement in AMP7. • We’re on-track to exceed our 50% self-generation target by the end of AMP6, with the Agrivert acquisition supporting our bioresources energy What do we and renewables strategy. mean by this? • Ofwat’s assessment of our PR19 business plan recognised our leading approach for bioresources. We’ll embrace market • The Hafren Dyfrdwy licence came into opening in the UK and effect on 1 July – we’ve invested in explore opportunities improvements in both the technology platform and asset base. There is for growth in new more to do to improve performance water markets. on the measures that matter most to customers at a cost that is affordable, and we are putting extra resources in place to do this.

READ MORE ON OUR ODIs AND KPIs ON PAGE 32

READ MORE IN OUR PERFORMANCE REVIEW ON PAGE 34

Severn Trent Plc Annual Report and Accounts 2019 27 Strategic report

How we are achieving our strategic objectives continued

What we said we would do in 2018/19 • We’re are also pleased to maintain our strong engagement scores following • Deliver a further step change in our our QUEST survey – completed by over safety performance and support the 90% of our workforce – placing us five wellbeing of our colleagues. points above the average benchmark • Continue to build on our strong for UK and Ireland. This is great news, volunteering performance and drive especially given the extra commitment the Corporate Responsibility agenda. of our people this year in the difficult circumstances during the prolonged • Continue our focus on improving hot weather over the summer. overall QUEST engagement scores. • We’re on-track to deliver our • Deliver the foundations of the new Training Academy by Spring 2020. Create an Training Academy, to make a positive Ensuring our people have the right contribution to technical development. mindset, technical competence and awesome Our progress 2018/19 leadership skills for now and in the future. We’ve repurposed an existing • We were awarded silver in the Mind building to provide a greener solution, place to work Workplace Wellbeing Index 2017/18. and are developing an exciting syllabus Our health and safety performance is that uses state-of-the-art training upper quartile within the sector and we techniques including virtual reality and experienced no major safety incidents network simulation. and no fatalities in the last 12 months. We did see an increase in Lost Time Areas of focus for 2019/20 Incidents (‘LTIs’), mainly due to slips, • Delivering an improvement in trips and falls. We have detailed plans our safety performance through in place to address this, with new focused interventions. data analytics being used to identify What do we specific areas for improvement. • Maintaining our commitment to the mean by this? Progress against these areas is wellbeing of our colleagues. considered at the Employee Forum, • Continuing to implement We’ll create a culture Executive Committee and Board. improvements identified by our In April 2019 we revamped our Goal QUEST engagement. of empowerment Zero Strategy, with dedicated quarterly awareness campaigns. • Developing an exciting and innovative and accountability syllabus for our new Training Academy. • Over the last year, Community with a focus on skills, Champions, our volunteering talent and career programme, has supported over 1,900 colleagues to make a difference development. by helping to make our region’s waterways even healthier and supporting our local communities.

READ MORE ON OUR ODIs AND KPIs ON PAGE 32

READ MORE IN OUR PERFORMANCE REVIEW ON PAGE 34

28 Severn Trent Plc Annual Report and Accounts 2019 > Strategic report Governance Group financial statements Company financial statements Environment, Social and Governance Other information At a Glance

We are proud to be recognised as the first socially purposeful We are committed to continually developing and improving company in the utility sector. The content below pulls together our approach, and continue to explore the role accreditations details of our sustainability performance that are integrated can play in providing legitimacy to this. We’ve developed throughout our Annual Report and Accounts. It also highlights a dedicated ESG page on our website where you can find where you can find more information on our Environmental, further information. Social and Governance (‘ESG’) performance.

2020-2025 Commitments ESG performance Read more

Carbon and Our triple pledge: Carbon reduction – Group net Greenhouse Page 126 Climate Change • Carbon neutral by 2030, more stretching Gas Emissions (‘GHG’) emissions fell by than science based targets; 27% in 2018/19. A reduction of 41% since • 100% electric vehicles by 2030 – (assumes the beginning of the AMP. Total annual net specialist vehicles such as tankers become emissions 268,283 tonnes C02e. available within that time window); and Renewable generation – Generated Page 125 • 100% renewable energy by 2030 (including equivalent of 43% of our electricity needs, self-generated and purchased energy). up from 38% in 2017/18. On track to exceed 50% target by 2020.

Water Industry Achievement awards – Page 126 Winner of the Energy and Carbon Initiative Links to our strategic objectives of the year.

Biodiversity Biodiversity – Improve 1090 hectares of Biodiversity – Improved biodiversity of six Page 39 land (or km of river) for biodiversity by 2025. hectares of SSSIs in 2018/19. On track to Tree planting – Plant the equivalent of one reach our target of 75 hectares by 2020. tree for every three households we serve Catchment Management – Gold award by 2030. winner at the Corporate Engagement Awards 2018.

Links to our strategic objectives

Water Water resources – Reduce unsustainable Water resources – Published draft Water Severn Trent Management abstraction by nearly 100 Ml/d. Resources Management Plan (‘WRMP’) setting website Water management – Triple the rate out our long-term plans to accommodate the of leakage reduction across the sector impacts of population growth, drought, and by 2030. Focus on metering households. climate change uncertainty to balance supply Education – offering every primary school and demand over the next 25 years. in the Midlands a visit from our Wonderful Leakage – Hit MLE target and have delivered Page 39 Water Tour, inspiring them to change water a reduction year-on-year of 16 Ml/d. usage behaviours. Water quality – 6% improvement in water Page 35

Environmental leadership quality complaints.

Catchment management – Worked in Page 38 partnership with over 820 farmers to reduce the amount of chemicals entering our raw water sources.

Education – Engaged over 130,000 young Page 35 people this year through our education programme, ahead of 125,000 annual target.

Water efficiency – Carried out 26,000 home Page 36 water efficiency checks to help customers manage their consumption. Installed 35,823 Links to our strategic objectives water meters.

Environmental River quality – By 2025 we will have River quality – On track to improve at least Page 41 Stewardship improved the quality of over 50% of rivers 1,600 km of our rivers by 2020. in our region. Single use plastic – Prevent the equivalent Single use plastic – Supported Refill Page 43 of four billion plastic bottles ending up as campaign, contributing to the 20,000 refill waste by 2030. stations in the UK. We have eliminated single use plastic from our office locations.

Environmental management system – Links to our strategic objectives 35% of our operations externally certified.

Severn Trent Plc Annual Report and Accounts 2019 29 Strategic report

Environment, Social and Governance – At a Glance continued

2020-2025 Commitments ESG performance Read more

Creating an Training – Investing £10m in the new Engagement – Awarded Glassdoor Page 108 awesome place Training Academy in the Midlands. Employees’ Choice Award – Top 50 Places Diversity and Inclusion – Committed to to Work in 2019. Ranked 3.9/5 overall 4.2 for to work recruit people from social mobility cold culture and values. Glassdoor reports that spots across our region, seeking to provide 74% of our people would recommend us to opportunities to all. a friend. Employee engagement score five points above the average benchmark for UK and Ireland. In 2018/19 our voluntary employee turnover was 6.5%.

Training – Above EU average for training Page 44 investment with over 15,000 training days.

Diversity and Inclusion – Fourth in Page 44 Hampton-Alexander Review FTSE100 for Links to our strategic objectives women in leadership, and the top utility.

Social mobility – Signatory to Social Mobility Page 113 Pledge. Top 20 Company in the UK’s Social Mobility Index.

Gender pay gap – Mean gender pay gap Severn Trent of 2.8%. website

Reward – The Remuneration Committee Page 110 ensures that pay is fair throughout Social – Our people the Company and ensures executive pay is aligned to the wider workforce remuneration; our all-employee Annual Bonus Scheme is a great example of this in practice.

Employee wellbeing – 70% of line Page 45 managers trained in mental health, and over 400 mental health first aiders available

Goal zero health and safety – LTIs per Page 45 100,000 hours worked – Severn Trent Water: 0.3 and Business Services: 0.29. Upper quartile performance in the sector. No fatalities in the last 12 months.

Zero tolerance approach to modern slavery Severn Trent – Modern slavery statement ranked 16th in website the FTSE100.

30 Severn Trent Plc Annual Report and Accounts 2019 > Strategic report Governance Group financial statements Company financial statements Other information

2020-2025 Commitments ESG performance Read more

Putting our Community contribution – We’re investing Vulnerable customers – £3.5m trust fund Page 24 customers first 1% of profits for a new community fund – to donations annually, 2.62 social return on make positive impact in our region. investment. Supported 52,838 people who Vulnerable customers – We’ll help nearly struggle, against an annual target of 50,000. 50% more customers who are struggling Our performance for customers – Overall to pay their bills by 2025 and develop a Page 36 customer satisfaction is 85%, 7% higher strategy to end water poverty. than the national average. Trustworthiness is at 73%, making Severn Trent the most trusted water company in England.

Customer Experience – Maintained 14th Page 33 position in customer Service Incentive Mechanism (‘SIM’) score. Upper quartile in the Institute of Customer Service’s UK index as the top English water and sewerage company (‘WaSC’) and only slightly short of Links to our strategic objectives the UK average in all sectors. Supporting our Innovation – Launched the World Water Charitable contributions – Founding Fund communities Innovation Fund. Our £5m investment partner of WaterAid and raised almost £30 website will make a real difference to lives across million since 1981. and wider the world. Volunteering – 32% of employees society Doubled the funding for innovation in AMP7. Page 44 volunteered in 2018/19 ahead of 30% target; UN Sustainable Development Goals improving 34 km of riverside and planting (‘UNSDG’) – Aligned our commitments over 3,000 trees. Social – Our customers and communities with the UNSDGs, highlighting positive contribution to 11 of the 17 goals. Responsible supply chain – 100% prioritised Severn Trent suppliers signed up to our Sustainable website Supply Chain charter. FTSE4Good certified Links to our strategic objectives

2020-2025 Commitments ESG performance Read more Committed to the highest standards Highly commended – PwC Building Public of transparency and corporate governance Trust Award for Executive Remuneration Reporting in the FTSE 350. Purposeful Company Task Force – Only utility to be named as a pathfinder by The Purposeful Company Task Force.

Governance Ofwat – Commended us on our ‘pathfinding Page 19 social purpose company’ thinking.

Ofwat – Awarded our Severn Trent Business Page 19 Links to our strategic objectives Plan fast-track status.

Severn Trent Plc Annual Report and Accounts 2019 31 Strategic report

ODIs and KPIs

We continue to make progress against our customer ODIs and financial KPIs Progress against our customer Outcome Delivery Incentives1,2,3

Embed customers at the heart of all we do

Internal sewer flooding4 External sewer flooding4 Minutes without supply Actual Actual Actual 729 3,795 19.7

Reward/Penalty Reward/Penalty Reward Penalty 873 6,499 9.4 12.0 £42,8201 £2,967 1,5 £1.10m 1 Rate of Reward/Penalty (per incident) Rate of Reward/Penalty (per incident) Rate of Reward/Penalty (per minute) Why we measure it Why we measure it Why we measure it To ensure we do everything we can to prevent To ensure we do everything we can to prevent Our customers value water being there when they flooding of customers’ homes or businesses. flooding of customers’ homes or businesses. need it. This performance commitment ensures we It is one of our customers’ most important priorities. It is one of our customers’ most important priorities. are driving down the impact of any interruptions to supply across our network to minimise the impact on Progress in the year Progress in the year customers. We agreed with Ofwat to strengthen our We agreed with Ofwat to strengthen our performance performance commitment on internal sewer commitments on external sewer flooding, from Progress in the year flooding from 1 January 2019, see page 37 for 1 January 2019, see page 37 for further details. We have interrupted customers supply for an further details. We are reporting a performance We also agreed to reduce our incentive rate from average of 19.7 minutes, higher than our committed of 729 incidents, ahead of our adjusted performance £19,779 to £2,967 at this time. We are reporting a performance level of 9.4 minutes. commitment of 873. performance of 3,795 incidents ahead of our adjusted performance commitment of 6,499.

Drive operational excellence and continuous innovation

Improvements to river water quality Number of Category 3 pollution incidents4 Successful catchment management schemes Actual Actual Actual 87 329 26

Penalty/Reward Reward/Penalty Penalty/Reward Reward Cap 233 374 12 21 £750,0001 £53,900 1 £1.03m1 Rate of Penalty/Reward (per qualifying point) Rate of Reward/Penalty (per incident) Rate of Penalty/Reward (per scheme) Why we measure it Why we measure it Why we measure it We have statutory obligations to deliver, but our Minimising the impact our activity has on the Our customers want us to look for new and innovative customers told us that we should do more where environment is a key concern for our customers. ways to improve water quality, whilst working in we can. This performance commitment ensures we This performance commitment ensures we drive partnership with other stakeholders to deliver wider meet our obligations and drives us to make faster improvements in this area. benefits. This performance commitment focuses on progress where it is possible. how our approaches are encouraging farmers and Progress in the year land owners to change their behaviour and practices. Progress in the year We are reporting 329 Category 3 pollution incidents We have delivered 53 qualifying Water Framework against an adjusted performance commitment of Progress in the year Directive points during the year and our cumulative 374 incidents. We have delivered 26 catchment management total is 87. We are on-track for our end of AMP schemes, well ahead of our performance commitment. target of 233.

Invest responsibly for Create an awesome Severn Trent Water Limited sustainable growth place to work 0.30 See our Regulated Water and Waste Water performance review on page 34. Lost time incidents per 100,000 hours worked 2017/18: 0.17

32 Severn Trent Plc Annual Report and Accounts 2019 > Strategic report Governance Group financial statements Company financial statements Other information

Progress against our financial KPIs7

SIM – Customer experience Complaints about water quality £1,767.4m Actual 11,923 Group turnover Not yet defined by Ofwat 2017/18: £1,696.4m8 Reward/Penalty 9,992 1 81.45SIM score £900 £573.6m Group underlying PBIT Rate of Reward/Penalty (per complaint) 2017/18: £539.8m8 Why we measure it Why we measure it Providing good quality service to our customers is Customers value the aesthetic quality of their key and the Service Incentive Mechanism (‘SIM’) water. This performance commitment is designed provides us with a regular opportunity to understand to ensure we manage our network to minimise the our performance and implement initiatives to number of events that cause discolouration, taste improve the quality of service we provide, but also or odour problems. 145.8p deliver value for money. Progress in the year Progress in the year During the year the number of drinking water Underlying earnings per share We have reported a SIM score of 81.45 for 2018/19, complaints reduced from 12,687 to 11,923, higher 8 which is below our target of upper quartile. than our committed performance level of 9,992. 2017/18: 120.5p

Asset stewardship – coliform failures Leakage Actual Actual 13 427

Penalty Reward/Penalty 5 429 Notes 1 1 1 In 2012/13 prices after tax. £463,000 £123,000 2 These are also key measurements used to assess our Corporate Responsibility performance. Rate of Penalty Rate of Reward/Penalty (per megalitre per day) 3 We have reported performance on our customer Why we measure it Why we measure it ODIs on a comparable basis by reporting the The presence of coliforms in our drinking water is Customers see leakage as a waste of a key current year performance for the Severn Trent unacceptable as it is an indicator of poor quality so resource. They want us to reduce our level of Water region that was in place during 2017/18. we continually monitor our works to ensure we are leakage as a priority. producing high quality water. 4 Targets have been strengthened from 1 January Progress in the year 2019, see page 37 for more information. Progress in the year We are reporting an outturn of 427 Ml/d which is During the year we detected coliforms at 13 of our marginally ahead of our performance commitment 5 Incentive rate reduced from 1 January 2019, water treatment sites, which is higher than our of 429 Ml/d. see page 37 for more information. committed performance level of five. 6 Engagement index used for the Group since 2015/16 to support benchmarking and gain better insight about us as an employer. 7 Alternative Performance Measures are defined in note 45 to the Group financial statements. Severn Trent Business Services 8 Restated for implementation of IFRS 15 see note 2 0.29 No change to the Group financial statements. Severn Trent engagement Key 6 Lost time incidents per 100,000 hrs worked score improvement Actual 2017/18: 0.15 2017/18: 6 percentage points Severn Trent Actual Performance 2018/19

Severn Trent Plc Annual Report and Accounts 2019 33 Strategic report

Performance review

Embedding customers at as well as making sure that our most the heart of all we do vulnerable customers have the support Regulated they and their families need. From the Bristol Channel to the Humber and from Rutland to North Wales, Their next most important issue is Water and we play an essential role in the lives something that’s fundamental for us as of 4.5 million households and non- a business – providing a reliable supply households. We provide them with of clean water and taking away waste Waste Water around 2.0 billion litres of high quality water without customers having to worry drinking water daily, and treat around about it. Our Regulated Water and Waste Water 2.9 billion litres of waste water every day. Customers also want us to continue business includes the wholesale water As part of the development of our Severn to invest in infrastructure, not just for and waste water activities (excluding Trent Water PR19 plan, we focused today but for future generations, in the Bioresources) of Severn Trent Water on customer insight gleaned from our same way that the Victorians did for Limited and its retail services to most intensive customer engagement us. They also want us to have a positive domestic customers, and Hafren activity in our history. This gave us a impact on our local environment and in Dyfrdwy Cyfyngedig. Unless stated solid foundation on which to create a the communities we serve. And they want otherwise the information in this comprehensive, detailed business plan – to be able to talk to us if, when and how section relates to Severn Trent Water one that was co-created with customers they want to, while also keeping them which makes up 98% of our total and put their wishes right at its heart. informed about what we’re doing. customer base. As we developed the plan we asked our This detailed engagement means we truly Customer Challenge Group, the Water understand what matters to our customers Forum, to rigorously challenge every – and that gives us a huge amount of clarity aspect of our customer engagement to around what we have to do for them in the make sure we’d addressed the issues months and years ahead. most important to them. The Forum gave us really constructive feedback that So, if those are the issues on customers’ led to us making further changes and minds for the future, how are we doing reassured us that we really were putting on those today? our customers first. Reducing customer bills The issues that matter This was the ninth consecutive year that Our engagement programme Severn Trent Water customers have confirmed that the issue that matters enjoyed the lowest bills in England. most for our customers continues to be Our average combined bill for the year affordability – keeping bills low for our was £348 – less than £1 a day – which essential service is their top priority, was more than £59 lower than the average bill and £152 lower than the highest.

Understanding different 4.5 million customers’ needs Number of households and As part of our development of the PR19 non-household customers plan, we undertook the most extensive customer engagement activity in our history. More than 32,000 individual customers took part in our face-to-face research and 15,000 people joined our online panel. We also evaluated 24,000 2.0 billion complaints and considered 1.9 million customer views. From this we created Litres of high quality drinking water our customer hierarchy of needs. every day

Ninth year 15,000 Number of years of the lowest bills in England for our customers People joined our online panel

34 Severn Trent Plc Annual Report and Accounts 2019 > Strategic report Governance Group financial statements Company financial statements Other information

Similarly, our Hafren Dyfrdwy customers Working hard to provide the quality The ODI measure focuses on coliform enjoyed the lowest bills in Wales at service that customers expect detections at surface and groundwater £311. Over AMP7, we’re going to be Our waste water performance continues sites, which have increased slightly this reducing bills in England by a further 5% to be sector leading both in terms of year. Our investment in distribution service in real terms, whilst at the same time performance and efficiency. We have reservoirs has delivered significant investing to make further improvements continued to reduce the number of performance improvements, and we are to the services which we provide to sewer flooding incidents that occur on confident that the next phase of our plan our customers. In Hafren Dyfrdwy our network, that we know can lead to will deliver similar improvements in the we’re increasing investment by 4% per the worst possible experience for our ODI measure next year. customer to improve services, whilst customers. We will never be complacent The resilience of our water supply was limiting the increase in customer bills about our performance and will continue tested through one of the hottest, driest to 1.9% in real terms over the five to push for year-on-year improvement summers on record – which saw a 22% year period. through further investment. increase in demand for water from our We understand that even though our bills After demonstrating strong customer customers at peak times. We worked are low, some customers have difficulty support for our proposal, we were tirelessly to give our customers the paying – so we do everything we can to pleased that, in December, Ofwat agreed level of service they expect and deserve, help those who are genuinely struggling to lift the customer ODI cap on our waste without the need for a hosepipe ban or to pay their bills. We do this through a water measures for the remainder of the other restrictions. range of measures, such as water saving AMP. This supports our desire to do more Supply interruption events were impacted devices and fitting meters for smaller for our customers and the environment during this period and this has affected and low occupancy households. We also even earlier than previously agreed our full year performance. We have offer our Big Difference Scheme which with Ofwat. increased our efforts in this area, our has helped over 35,000 customers who focus being on ‘Prevent, Restore, Repair’, are struggling to pay their bills access This year, we have made continued and we delivered a 64% improvement in discounts of up to 90% over the last progress on key clean water metrics our performance in the second half of the 12 months. such as water quality complaints, with a further 6% improvement, building year. Additional information can be found Looking ahead, we intend to help even on our achievements of last year when on page 38. more of our customers. For example, complaints were down 12%. We’ve also We are particularly pleased with the our PR19 plan includes a commitment worked well with our supply partners progress we are making in partnership to support almost 50% more people to resolve issues on 35 properties with landowners and farmers across between 2020 and 2025, through which were at risk of low pressure. our region to improve the ecology of schemes such as our social tariff We’re continuing our multi-year journey rivers in our region. Our industry leading and through other options, such as to improve our coliform performance Catchment Management Programme has payment breaks. in our distribution service reservoirs, yielded great results over the past year surface water works and groundwater and demonstrates the power of strong works – for which coliforms are collaborative working. We talk more a key measure of asset health. about this on page 38.

Engaging with the customers During the last 12 months, our tour has of the future engaged with over 130,000 young people, We’re getting even more involved in the and will be available across our region communities in which we live and work, from 2020-2025. for example through our Wonderful Water Tour – an innovative educational roadshow that every primary school in the Midlands will have the chance to take advantage of. The Severn Trent Wonderful Water The Wonderful Water Tour is targeted Tour helped launch our Wild Water at children aged between seven topic with a splash! It inspires and and 11, to inspire them about water. educates the children, catering for Comprising two buses and a whole host all children’s interests and abilities. of gadgets and hands-on activities, the The knowledgeable, friendly and Tour educates children on three key helpful staff engaged the children messages: the importance of using at all times and helped bring our water wisely; helping them understand water topic to life.” what they can, and can’t, put down the Tracey Gillin toilet and sink; and the health benefits St Anne’s Catholic Primary School, of staying hydrated. Nuneaton

Severn Trent Plc Annual Report and Accounts 2019 35 Strategic report

Performance review continued Regulated Water and Waste Water

Investing for future generations Serving local communities Customers trust our performance This year has seen our biggest single We’re very aware of the central role We are proud to have been acclaimed year of capital investment in the last we play in our community – this is not the most trusted water company in decade, demonstrating our commitment only where we work, but where most England, by the most recent independent to continued investment in long-term of our employees live. We know that customer satisfaction tracker. We feel infrastructure. All of our current our customers want us to do more – to that this reflects the huge progress we’ve major capital schemes made good help improve the environment, support made in delivering on the issues which progress during the year including our education, and give something back. matter most to customers: investing Birmingham Resilience Project, which is in the resilience of our network and We carry out an enormous number of the biggest water enhancement capital renewable energy, as well as doing more projects to enhance rivers and other project in the sector to be completed for our must vulnerable customers. natural resources – many of them within AMP6. This will ensure security of supported by our employees who We know we’ve still got more to do on supply to Birmingham for generations. dedicated over 2,000 days to volunteering SIM, Ofwat’s current customer service Please see page 40 for more details on during the year. Our supply chain also measure and we were disappointed to this and other key capital projects. supports us in our environmental finish the year in 14th place. However, Listening, every moment of every day ambitions, undertaking a variety of we were pleased to again be in the top We’ve made it even easier for our charitable environmental projects such quartile of utility companies in the UK customers to contact us through as the Northshore Beach Walk Project Customer Service Index, which will be whichever mode they prefer, whatever at Draycote. relevant in AMP7 when Ofwat’s new customer satisfaction measure (‘C-MeX’) the time of day. People can phone us, Looking ahead, through our new is set to be introduced. C-MeX will be talk to us on webchat on the website, community dividend we will invest 1% partly based on customer contact, through various social media platforms, of our profits in community projects – as with SIM, and partly on customer or write to us. a really exciting opportunity to make a perception which is a much wider positive impact in our region. Our hope is We also launched Tap Chat during the measure. We welcome this change as that the community dividend will benefit year. This new online community panel C-MeX will ensure that the totality of thousands of our customers, together gives us feedback about how we’re the experience of all our customers with their communities, to make a doing and, more importantly, how we is represented. can do even better. With 15,000 active positive difference to their everyday lives. participants, representing all walks We are also doing more to engage with of life and areas across our region, our customers of the future through the Tap Chat played an important role in Wonderful Water Tour, see page 35. shaping our PR19 business plan and provides ongoing engagement with our customers.

Here when you need us Helping customers to help us We can’t deliver great service to our Extra demand for water as a result customers unless we’re aware of the of increasing population and climate issues that matter to them. So it’s change means it’s vital that our important that they can contact us at a customers know how to use water time that’s convenient to them. We offer wisely. First, we need to give them a wide range of contact channels – they the right advice to help them save can ring us, talk to us through our live- water. And second, we need to provide chat on our website or via social media. them with the tools they need to They can even write us a letter if they achieve that. prefer. Whatever method they choose, Last year, we carried out around they will be certain of a response. 26,000 home water efficiency checks More than 1.9 million customers are to help customers manage their now signed up to our online offerings consumption, save money and and, during the last year, our web protect future supplies. self-serve platform handled more than 1.6 million customer contacts. And the hard work of our customer communication team was recognised by a Silver Award at the European Contact Centre and Customer Service Awards.

36 Severn Trent Plc Annual Report and Accounts 2019 > Strategic report Governance Group financial statements Company financial statements Other information

Driving operational Another strong year for waste water Sewer flooding excellence and continued performance We’ve continued our focus on sewer innovation Removing waste water safely and flooding and during 2018/19 we efficiently is hugely important for outperformed our internal and external Our customers expect us to improve our customers – so we’re very pleased to sewer flooding targets by 16% and 41% core services every year. That means report that our excellent track record respectively. We’re continuing to drive providing them with clean drinking continued during 2018/19, with significant performance through targeting proactive water which is there when they need outperformance against internal and work on sewer flooding hotspots across it – and taking waste water away external sewer flooding, Category 3 our waste network. efficiently before recycling it safely pollution targets and a whole host of Alongside investment in infrastructure to the environment. other environmental measures. we have used innovative chemical We’re committed and long-term On a like-for-like basis, we earned treatments to help reduce the build-up of supporters of Ofwat’s customer Outcome £103.1 million from waste water ODIs in fats, oils and greases (‘FOG’). We’re also Delivery Incentives (‘ODIs’), which reward the year which was reduced to £7.1m by working with communities and industries companies when they exceed targets the impact of the regulatory cap agreed to reduce the amount of FOG that ends for measures that customers feel are with Ofwat and changes to our ODI up in our sewers. Our programmes to the most important, and also penalise incentives and targets for the remainder educate customers and their children companies for poorer performance. of the AMP. After providing evidence on sewer misuse are an important In our view, this is the best way to ensure of support from our customers, in element of our approach, see page 35 high quality performance for the benefit December 2018, Ofwat agreed to raise for more information. Additionally, we’re of all stakeholders – our customers the cap and we accepted even more identifying and taking legal action against and communities, our investors and the challenging measures. This will allow businesses that clog our sewers with environment. We’ve agreed with Ofwat to us to deliver an even better service FOG and recovering operational costs in share our expertise with the rest of the for customers earlier than previously cases where prosecution is not possible. industry so that all customers in England planned and to continue to drive These are important factors in our goal and Wales may benefit. improvements in the industry. to create a calm network and ensure We’ve continued to deliver on our track an enhanced and sustained service record in the waste water measures provision into AMP7 and beyond. that customers have told us are the most important. Overall, 2018/19 was also an encouraging year for our water performance as we continue to make progress on our multi-year improvement journey on water quality and provided a high quality product to our customers, whilst protecting public health.

Fighting the fat(berg) Making more informed decisions A major cause of sewer flooding are Our continued investment in monitoring blockages which can be caused by technology such as sensors and loggers fatbergs, the common name for the has further informed our teams’ decision build-up of wet wipes, fats, oils and making. In fact we have more data grease into a solid mass which has points than any other water company potential to block pipework. in England or Wales. Armed with real time awareness of supply and demand Our fight against fatbergs is based on across our region, we’re able to forecast education and prevention. For example, stresses and strains on the network and while cleaning the sewers of Stratford- proactively take action to ensure that upon-Avon in December 2018, we found customers are provided with an excellent and removed several build-ups that could service. We now have 19,500 additional have developed into major blockages. ‘eyes and ears’ on the network and are Working with 24 food service outlets and on track to have 35,000 by the end of officers from Environmental Compliance March 2020. and Services, we launched a programme aimed at educating catering outlets about the right – and wrong – ways to dispose of fats, oils and greases.

Severn Trent Plc Annual Report and Accounts 2019 37 Strategic report

Performance review continued Regulated Water and Waste Water

Pollutions Water catchment initiatives have played a We demonstrated resilience and flexibility We work hard to manage our impact on major part in this improvement and we’re in our network during this time – and the environment. We were pleased to continuing to work with farmers and focused on prioritising resources to meet have continued to outperform against other stakeholders to raise the quality of the additional demand and minimising the challenging targets we set ourselves the water that enters our rivers. We see the impact on our customers. We proved for Category 3 pollution incidents. this as a key long-term focus for us in financially resilient, and were able to Our performance was flat, in line with ensuring the stability of our treatment absorb the increased costs associated last year despite a challenging start processes and quality of our product with pumping up to an extra 400 million to 2018. By re-doubling our efforts to customers. litres of water per day at peak times and the 24/7 use of a fleet of water we’ve delivered significantly better We have introduced new technology to tankers to top up service reservoirs. performance in the second half of 2018 drive further improvements in water Our operations were largely resilient and which we have sustained throughout the quality in years to come by ensuring we came through the heatwave without beginning of 2019. we proactively intervene to address imposing any restrictions on usage such risks to water quality. For example, We have more work to do on serious and as a hosepipe ban. However, some of bacterial analysis can take 30 hours from Category 4 pollution incidents and are our water network measures, including taking a sample to receiving a result. disappointed that we missed our targets supply interruptions, were adversely Our innovation team analysed technology on these measures. During the year we impacted during the period, as outlined across a range of different sectors continued our programme to roll-out below. Our focus during this time was and created a bespoke solution that is more monitors which will significantly on prioritising resources to meet the acknowledged as the world’s first online improve our ability to detect issues and additional demand and minimising the bacterial monitoring system. This gives prevent pollution incidents occurring in impact on our customers. future. We are focusing our efforts on us high quality analysis in real time, the highest risk areas to ensure we get allowing us to identify issues quickly and Supply interruptions the best possible outcome as quickly take action to prevent bacteriological Supply interruptions ended the year as possible. failures at our treatment works and at 19.7 minutes against our target of distribution service reservoirs. By the 10.8 minutes. We have increased our Focusing on water quality and supply summer of 2019, we will have 20 units focus on this area and we are starting Good progress on water quality available, most as fixed installations, to see definite improvements through as well as others that we can use on a Following our renewed focus on water our ‘Prevent, Restore, Repair’ strategy, mobile basis. quality in recent years, complaints which focuses on preventing asset failure fell again by 6% during 2018/19 in line Meeting water demand where possible, and restoring supply with the target agreed with the DWI. at speed if it happens. Performance in The summer of 2018 saw a period of This builds on our achievements of last the second half of the year improved prolonged hot, dry weather – and we saw year, when complaints were down by 12%. by 64% and we delivered our best ever a 22% increase in demand for water from performance in February and March. our customers at peak times.

Managing our catchments This innovative and industry-leading When it comes to improving water scheme has seen over 820 farmers quality, prevention is always better sign up to protect raw water sources than a cure – so over the last year from pesticides and other chemicals – we’ve continued to make investments and resulted in peak concentrations of to ensure that the water that enters metaldehyde – an anti-slug pesticide our rivers is as clean as possible in which is expensive and difficult to the first place. Known as Catchment remove at water treatment works – Management, this approach is not reducing by 64%. only great for the natural environment This is good news for the environment by reducing pollutants entering because it enhances biodiversity, good watercourses, it also ensures that news for customers because it reduces the quality of the water we abstract is treatment costs and enables us to improved. This improves the quality of invest elsewhere in the network, and our final product and in some cases good news for investors because it’s reduces the processing requirement at generated £11.4 million in customer our treatment works, reducing the cost ODI outperformance payments. We are or producing our wonderful product. expanding our catchment schemes We’ve already established an excellent to include biodiversity options in our record in this area, particularly farmer grants and aim to increase through the success of our Farm to grant uptake by 42% by 2025. Tap scheme.

38 Severn Trent Plc Annual Report and Accounts 2019 > Strategic report Governance Group financial statements Company financial statements Other information

Over the last year we’ve achieved a dramatic • introducing innovative ways of finding Improving our environment improvement in the speed at which we leaks faster, and fixing them more The way a company interacts with the arrive on site, this has significantly reduced efficiently – including accelerated environment it operates in has risen – supported by our new video calling service installation of acoustic loggers, to the top of the agenda for all of our which enables us to assess an issue remotely, targeted WIP reduction and the use stakeholders. Increasingly, these groups deploy the right resources to site quickly of more innovative solutions such as expect utility companies to demonstrate and support us in fixing the issue, first time. satellite technology; and performance beyond financial return. At the same time we’ve continued to • spending time to better understand our We take great care to understand and invest in technology that provides us with leakage component data – giving us control the impact we have on the valuable insight into how the network is more clarity on how we can best target environment in everything we do – operating. Technological innovations such leakage and providing more accurate when taking water from our rivers and as low point loggers, acoustic loggers and reporting going forward. reservoirs, and when safely returning it advance analytics are all now hard at work back to the river in a clean state. As in prior years, we base our customer across our network. We now have 19,500 ODI on ‘unaccounted water’. The weather We’re committed to creating thriving additional ‘eyes and ears’ on network and events earlier in the year, which led to an bird, insect and plant habitats in our are on-track to have 35,000 by the end of increase in pipe bursts and an increase region. We improved biodiversity on six March 2020. Furthermore, we are focusing in demand, also led to an increase in hectares of Sites of Special Scientific on understanding the true causes of failure unaccounted water. The considerable Interest (‘SSSIs’) during the year, and which lead to supply interruptions and momentum we generated has reduced we’re on-track to reach our target of addressing them at source – investing in this impact, though has still resulted in a 75 hectares by 2020. By 2025, we’re operating a calmer network to reduce the penalty. Our key focus is now on retaining aiming to work with organisations failure rate across our network. that energy to reduce leakage and hit our such as the Wildlife Trusts to improve biodiversity on a further 1,015 hectares. Driving improvement in leakage target in 2019/20, keeping us on the right track to meet the 15% challenge in AMP7. That’s an area equivalent to around The first half of the year was operationally 1,400 football pitches and represents challenging, with the tail end of freeze- As outlined on page 18 we have recently more than a tenfold increase over our thaw followed by the hot, dry summer launched the World Water Innovation current target. putting pressure on some of our key water Fund – joining forces with like-minded measures. Our significant focus in the second companies across the globe to find new As well as putting significant new effort half means we have hit our performance ways of working – pooling resources behind our Catchment Management commitment for leakage and delivered and ideas to develop and accelerate initiatives, we’ve also been working with a reduction year-on-year of 16 Ml/d by: new technologies. Our £5 million other partners to improve raw water. investment in the Fund will make a Rivers in the UK, including the rivers • maintaining our strong operational focus Severn and Trent in our region, are on leakage recovery and improving real difference to peoples’ lives across the world. The Fund’s initial focus will now cleaner than at any time since the processes to reduce known network industrial revolution. leaks – including a 67% increase in be on leakage, which is a key issue for leakage fix teams; all companies.

Proud to hold the Carbon Improving raw water Trust Standard We are working with our partner We’ve been proud to hold the Moors for the Future on a project Carbon Trust Standard since 2009. that’s transforming a moorland area This certification recognises that around Ladybower Reservoir. We’ve we take a best practice approach invested over £1 million during the to measuring and managing our current AMP to help re-vegetate 114 environmental impacts. In the last acres of peat, protect 16 hectares of 12 months, our Group net GHG blanket bog and dwarf shrub, and emissions fell by 27%. plant new trees across 170 hectares. This has cut peat erosion and Read more on page 126. protected one of our region’s most diverse habitats, while also improving the quality of the raw water which will further reduce our treatment costs.

Severn Trent Plc Annual Report and Accounts 2019 39 Strategic report

Performance review continued Regulated Water and Waste Water

Investing responsibly for We’ve replaced 230 km of our water In Nottinghamshire, we made great sustainable growth network, enabling us to make further progress on a scheme to improve our progress on water quality and again meet services in Newark, where a £60 million Since privatisation, we’ve invested the low pressure customer ODI target. programme will benefit 400 local £22 billion in today’s money and the pace We’ve also completed 28 capital projects homes and businesses. We’re installing and scale of our ambition continues to improve our waste network, helping 4 km of high volume sewers to reduce to grow. In 2018/19 we invested over us to maintain upper quartile on cost flooding risk, as well as 10 km of new £750 million in our asset base as well as and performance. water network to improve water supply. a further £141 million in renewing our We achieved a major milestone this year, All of our major schemes made good infrastructure network – our biggest with the completion of a 3 km tunnel progress during the year, including the year of capital investment in a decade. which encircles the town 15 metres Birmingham Resilience Project (‘BRP’). And we’re on-track with our commitment below ground. This hugely complex This will secure a second source of to invest £1,300 for every household we project was carried out through the water supply for Britain’s second city serve over AMP6. town centre and under a major railway and safeguard one of our oldest, but line – and our efforts to limit disruption We’ve worked hard to maximise the value most strategic and efficient, water were acknowledged by the Community we get from this investment and continue resources for years to come. The BRP Engagement Award at the New Civil to forecast AMP6 Totex efficiencies of is the biggest AMP6 water enhancement Engineer Awards for high-quality £870 million. These efficiencies have capital programme in the sector and will community engagement. enabled us to re-invest £220 million to be ready to deliver anticipated benefits improve our water networks, making to customers in 2020. Thanks to the way As part of our commitment to invest them more resilient and reliable through we have delivered the project it is on £1,300 for every home and business we utilising the latest technology available. track to deliver supply resilience benefits serve in the five years to 2020, this year This investment will benefit customers – in the event of both water resource we started work on a new £11 million today and also generations to come. and treatment failures – and to enable investment to improve the resilience and effective proactive maintenance of some reliability of the clean water supplied Investing for today... and for of our most important assets for the long to around 55,000 people in Stroud, future generations term. This is the result of considerable Gloucestershire. The upgrade project Our mission is to create a lasting legacy hard work and effort from our people will see 16 km of new pipeline stretching for future generations. We do this by and supply partners, as well as some from Minchinhampton reservoir investing in new infrastructure, by bold decisions, such as our decision in to Whaddon. exploring and investing in ways to provide spring 2017 to replace our original supply additional capacity, and by taking our partner. Progress in the year included Wonderful Water Tour around schools completion of the 25 km raw water to inspire the next generation to use pipeline that will transport water from water wisely. the River Severn to our Frankley water treatment site.

Investing to keep water flowing Every year, we invest significant capital to improve water supplies to communities with a history of poor supply in times of high demand, such as through the summer months. In 2018/19 we carried out works that are now providing an improved service to farmers and other residents in the uplands around Breamfield in Derbyshire. These works included commissioning a borehole, installing new valves to reduce airlocks and connecting existing pipework to other parts of the network so that water can be quickly pumped into the area when necessary.

40 Severn Trent Plc Annual Report and Accounts 2019 > Strategic report Governance Group financial statements Company financial statements Other information

Seizing opportunities to improve New partnership model with Receiving fast-track status has allowed our environment our supply chain us to make an early start on our We have a duty – and a great opportunity We revised our capital project operating capital programme of over £2 billion – to use our experience, expertise and model during the year in order to boost construction investment in AMP7. resources to protect local environments our internal capabilities and deliver In March we announced the contractors across our estate. better value, for all of our stakeholders. we will be working with for the first two lots of our AMP7 capital delivery Environmental sustainability is hugely Implementation of the new model began framework – Lot 1 (Capital Delivery important to our capital programme, early in 2019 and, when complete, we will Design and Build Framework) and Lot and we’re constantly looking for ways to have a skilled and capable in-house team 2 (Capital Delivery Build Framework). reduce our environmental impact. We’re able to provide design and feasibility Over the next 12 months we will start to working on the development of innovative study services that have historically work with our new construction partners solutions at our sewage treatment works been outsourced. The design team to define the key projects which we will which will enable us to meet the needs will take full responsibility for some deliver for our customers. of a growing population in a sustainable projects, while also providing support manner. We’re on-track to deliver a and expertise to existing suppliers Our suppliers and partners number of schemes in the final year of where appropriate. A core principle of our supplier contracts the AMP under our sustainable sewage In AMP7 we also plan to work with a is that they sign up to our Sustainability treatment works ODI, including our site larger number of contractors than Supply Chain Charter and support at Rugby. previously, contracting directly with our our corporate social responsibility We also remain committed to creating Tier 2 suppliers as well as our network agenda, including commitments on and sustaining cleaner rivers. We’ve of larger suppliers – known as our One safety, sustainability and human rights. invested significant time and resource Supply Chain (‘OSC’). Targets for individual suppliers are to fulfil our obligations under the Water tailored to their circumstances and role, Framework Directive (‘WFD’) to achieve but as a minimum we expect them to ‘good’ status for all watercourses. adopt our values, comply with national laws, demonstrate alignment with the This year we have completed an United Nations Global Compact initiative additional 27 sewage treatment and take proactive measures to avoid upgrades, which are helping us improve environmental and social harm. over 430 km of river. We’re on track to improve at least 1,600 km of our rivers in AMP6 – and a further 2,100 km in AMP7.

Making the right connections The proposed interconnector is expected With an increasing population and hotter, to be a large bore pipe that will move drier summers continuing to drive up water quickly from the wetter north demand for water, we’re working with and west of England and Wales to the our peers and regulators to identify drier south and south-east. In our solutions that deliver for the whole of PR19 business plan, we’ve committed the UK – not just for our region. And we to completing all planning and design were pleased that our collaboration with activity to get the scheme ‘shovel ready’ United Utilities and Thames Water on a by 2025. potential Severn-Thames interconnector Ofwat has endorsed the concept of the took another important step forwards interconnector and is expected to set up during the year. a regulatory alliance with the DWI and the EA. This will help manage the project through the legislative and licensing stages, and ensure it delivers the 4% anticipated benefits. The percentage of water supplies transferred today

Severn Trent Plc Annual Report and Accounts 2019 41 Strategic report

Performance review continued Regulated Water and Waste Water

Changing the market Our latest business plan set out our At the same time, we’re also working for the better ambitious programme with four hard to lead the way in how local services key elements: are delivered. Having already integrated England and Wales have seen a Dee Valley Water into the business, we • to provide our customers with world transformation in water services over the were pleased to officially launch our class services – this sits at the heart last 30 years. Drinking water is cleaner, Welsh business Hafren Dyfrdwy in July of everything we do; supply is more reliable, sewer flooding 2018. This has aligned our operations is much less frequent and rivers are in • to treat our customers as individuals, with the England-Wales border, with all a better state of health than at any point with their own unique needs and customers in Wales now being served by since the 18th century. All this has been preferences. In our view, service the new business – bringing clarity to the achieved while keeping bills affordable, should be personal; water market in the area. with Severn Trent leading the way with • do more for society as a whole. the lowest bills of all. For example, by investing in educating At Severn Trent, we’re committed to future generations to preserve water changing the water market for the better and reduce the quantity of unwanted – by playing our part and doing even more items into the sewer network; and for our customers, the environment and • do everything we can to build trust. wider society. We work with companies Among many examples, this means and other organisations both within and ensuring that our decisions are guided outside our industry, combining our by feedback from our 15,000 strong joint expertise and resources to make a customer panel, and also establishing difference for our people, customers and our new community dividend. broader society. Many of our Corporate Social Responsibility commitments echo the United Nations Social Development Goals, and during the year we explored how best to express our support for these, as part of the creation of our PR19 business plan. Looking ahead, we’ll continue to refine our reporting and better align our internal policies to these goals.

Driving innovation in waste water A new test-bed facility under construction at Redditch in the West Midlands is set to transform the way we evaluate and commercialise a wide range of new technologies. It is the result of our £6 million investment, plus further significant capital support from European and UK research organisations. The test- bed will enable us to identify how the best ideas from academia can be applied in a practical way to benefit the water sector as a whole. These ideas include exploring how we can turn phosphorus, proteins, cellulose and bioplastics extracted from our waste streams into marketable products.

42 Severn Trent Plc Annual Report and Accounts 2019 > Strategic report Governance Group financial statements Company financial statements Other information

Creating an awesome Employee engagement This approach is yielding positive results. place to work We believe in open and honest We’ve been honoured with a Glassdoor communication between our Employee’s Choice Award, recognising Our people are fundamental to the management team and our employees the Best Places to Work in 2019, and success of our business. We’re fortunate at all times, and continually engage with Glassdoor reports that 74% of our to have a team of dedicated, skilled them via formal and informal routes. people would recommend us to a friend. individuals that serve our customers Our average retention over the year was 24 hours a day, 365 days a year. We’re For the last two years, our employee 90% and QUEST results reported that a team that’s not only passionate about survey (‘QUEST’) has achieved a 92% of our people say they’re proud to what we do – but also brilliant at making participation rate of over 90%, which is work for us and 93% feel we trust them things happen. We work very hard to five points ahead of the UK and Ireland to do their job. keep it that way, by ensuring that Severn benchmark. This feedback informs our Our Employee Forum brings together Trent is an awesome place to work. engagement strategy and acts as a catalyst for continued improvement and around 20 employee representatives in In the Group we employ around 6,500 positive change. Recent developments quarterly meetings and is co-chaired by a people, most of them at locations across that have been shaped by the survey member of the Executive and a member the East and West Midlands and in include greater visibility of pay of the Trade Unions. Our Chairman and North and mid-Wales. Each member structures, helping our employees Chief Executive rotate attendance and of our team plays an important role in understand how their pay is set and in 2019/20 our Non-Executive Directors helping us provide excellent services how they can progress their careers to will be invited to attend. These sessions to customers and build a lasting increase their earning potential. cover a range of topics. Discussions over water legacy – and they deserve our the last year have included health and wholehearted support at all times. We’re are also pleased to maintain our safety, the content of our PR19 plan and We work hard to create a workplace strong engagement scores following our social purpose. These discussions that’s welcoming and safe, where good our QUEST survey. In a year of intense have led to practical changes in how work is well-rewarded and people are activity this underlines the positive we work – such as a full refresh of our treated with respect. relationship that exists between the induction experience, the education of Group and our people. Our employees our workforce on modern slavery and We engage with our employees at every want to engage with us and shape our installation of gender neutral changing opportunity, helping them progress and business, they know that their concerns rooms at all locations – including enjoy satisfying, rewarding careers. are listened to and acted upon – and operational sites – to support our We look after their health, safety and they’re proud to work with us to improve commitment to greater diversity. wellbeing and forge strong links with every aspect of our performance. the communities that most of our people Read more on page 108. call home.

Helping our customers to This year, we organised ten volunteer- reduce plastic led action days in some of our key towns We’re delighted to support Refill across and cities, encouraging local businesses our region – a fantastic scheme that to sign up to Refill. The reception was promotes the health benefits of tap overwhelmingly positive. With the help water, while helping to protect the of over 150 enthusiastic Severn Trent environment. There are now over 20,000 volunteers, and the support of local refill stations in the UK where you can councils and environmental groups, fill up a water bottle for free, including we’re helping to make it as easy as shops, cafés, restaurants and museums possible for our customers to refill – simply look for the blue sticker in when they’re out and about. All our the window. visitor experience sites have signed up as refill stations too. In our region there are now over 1,700 20,000 refill stations. If each of these are used twice a day instead of a customer buying refill stations in the UK a new plastic bottle, then this would save over 1.2 million plastic bottles in 150 a year. enthusiastic Severn Trent volunteers

Severn Trent Plc Annual Report and Accounts 2019 43 Strategic report

Performance review continued Regulated Water and Waste Water

Promoting diverse talent 8.7% of our employees consider Providing careers not just jobs We’re dedicated to providing themselves to be Black, Asian or Minority We strive to create careers with purpose opportunities for all – and that starts by Ethnic (‘BAME’). The number of BAME and meaning. Our aim is to attract giving people the chance to enjoy a great graduates rose by 4.6% during the year. and retain talented, hard-working career regardless of their postcode, We’re equally proud of our track record people who want to progress in their education, gender, ethnicity or whether in gender diversity, and were ranked careers and provide great customer they join as apprentices, graduates or fourth among all FTSE100 companies service. We support the development from other organisations. and the first utility once again in the of all colleagues at all stages of their Hampton-Alexander Review. We’ve career and want every employee to With around 30% of the UK’s social continued our focus on providing a feel competent and confident in their mobility coldspots in our region, we’ve more inclusive working environment everyday work. During the year, we refined our recruitment process to for our LGBT+ employees, and during provided our teams with over 15,000 remove some of the barriers that the year it was great to see Severn training days and delivered more than traditionally prevent people from those Trent represented prominently at both 25,000 e-learning hours. areas applying to companies like Severn the Coventry and Birmingham Pride Trent. For example, we’ve removed events. We also launched our LGBT+ Ally As part of our preparations for AMP7, some of the qualification requirements Programme this year, an opportunity for we’re creating the Severn Trent Academy, for applicants. We’ve also sent some all employees to challenge behaviour and which will be a step change in the way of our younger employees into schools actively support their LGBT+ colleagues. we provide training and development to demonstrate that people from all to our colleagues. This will ensure walks of life can succeed. These actions Our employability initiative with that our people have the right mindset, help to ensure that the make-up of our Hereward College in Coventry – a college technical competence and leadership workforce reflects the diversity of our for young people with disabilities and skills for now and in the future. region – and brings employment and additional needs – is another example By offering foundation apprenticeships money into areas that need it most. of how we’re making a real difference and graduate entrants, through to higher Details of some of the outcomes of our to people’s lives. We offer one year and degree level apprenticeships and Social Mobility Programme can be seen placements to Hereward students, with Masters degrees, we will ensure that our in the case study on page 45. the aim of turning these short-term workforce is resilient for the future. posts into real, long-term jobs – and we were delighted to offer full-time jobs to individuals in the most recent cohort. The year also saw us continue to perform well on gender diversity, with the gender pay gap now standing at 2.8%, a small increase on last year’s 2.4%. Further details on our gender pay gap reporting can be found on page 112.

Playing our part Our teams again supported a wide Our volunteering programme continues range of charities during the year, to prove popular, with all employees raising over £390,000 for our long-term being given two fully paid days to partner WaterAid as well as providing volunteer in local communities. facilities and people to operate call In 2018/19, this amounted to a total centres for Comic Relief and Children in of 2,000 days of labour, much of it Need. We have recently agreed our new dedicated to our Community Champions partnership agreement with WaterAid Programme where we worked for the period 1 April 2019 to 31 March alongside partners such as the Canal 2024 and will be raising money to fund and River Trust to improve 34.4km of a climate change resilience project riverside environment. In AMP7, we’re in Bangladesh. expanding the volunteering programme to work with Heart of England Forest, planting trees to create and protect 32% a huge broadleaf forest across the Midlands. We look forward to providing of our employees volunteered further detail on these plans over the in 2018/19 coming months. Over 1,900 days dedicated to our Community Champions Programme.

44 Severn Trent Plc Annual Report and Accounts 2019 > Strategic report Governance Group financial statements Company financial statements Other information

Our graduate and apprentice schemes It’s an indication of our employees’ pride We’ve continued to campaign to remove are always in demand, as we strive in Severn Trent and their appreciation the stigma associated with mental health to offer people a way into the Group of the advantages of the pension and have trained a further 28 mental regardless of their educational, social arrangements that, during the year, health first aiders. More than 70% or cultural background. In 2018, we 98% were members of the pension of our line managers have now been launched three new apprenticeship scheme and 57% paid contributions trained on mental health awareness. programmes within our HR, Legal above the minimum of 3% with 36% We have 400 mental health first aiders and Vehicle Technician populations. contributing to receive the maximum in place to help those who need support. We now have 11 active apprenticeship Company contribution. We continued our work to help people programmes, and expect this to increase understand how menopause affects Many of our colleagues are shareholders to 13 in 2019, to include Degree Level individuals and families and we’ve shared as well, either directly through our share Quantity Surveying and Level 2 Tanker our approach with other organisations, plans, such as Sharesave – which nearly Driver Apprenticeships. including Ofwat and the DWI. 70% of our employees participate in – or Rewarding our employees indirectly through private pensions, FTSE Supporting our communities As part of being an awesome place to index trackers or other investments. The vast majority of our employees are work it is important that our people are Promoting health, safety and wellbeing also customers and members of the properly rewarded. During the year, in communities in our region. Our people We believe passionately that no-one response to feedback raised through don’t just serve our local communities, should be hurt or become unwell by the Employee Forum and QUEST, we they are an integral part of them. what we do. With this in mind we provide communicated with our teams to make The case study below demonstrates the extensive training on all aspects of sure that they understand how their pay passionate support our people have for health and safety. We are pleased that is set and how they can earn more by their friends, family, neighbours and over the last two years we have been progressing through the business. the local environment in volunteering to consistently upper quartile in Water UK make a difference. We also ensure we help all employees benchmarking on Lost Time Incidents keep an eye on the future. We offer a (‘LTIs’). However, whilst we experienced market-leading defined contribution no major safety incidents and no fatalities pension scheme and double in the last 12 months, unfortunately we contributions that our employees make did see an increase in LTIs, mainly due to (up to a maximum of 15% of salary), slips, trips and falls. This is the subject regardless of their level or seniority. of regular discussion at the Employee As our people approach retirement Forum, Executive Committee and Board we provide education and support to and in April 2019 we revamped our Goal help them plan for the next stage of Zero Strategy, with dedicated quarterly their lives. awareness campaigns.

Turning up the heat on social Raising awareness of modern slavery Attendees gave us very positive mobility coldspots Modern slavery is a growing global and feedback, with 98% reporting that they Our region includes 30% of the nation’s local issue, impacting an estimated now felt confident in identifying modern social mobility coldspots. We’re 40.3 million people worldwide. We’re slavery indicators and reporting it. working hard to redress the balance, committed to eradicating forced labour Our senior management team have and the evidence suggests that we’re and using our influence within our also received a dedicated briefing. already making a difference. supply chain and wider stakeholders We were pleased that our 2018 Modern to help them do the same. To date, We were placed 20th in the Social Slavery Statement was ranked 16th no instances of modern slavery have Mobility Index, up 18 places on the among FTSE100 companies by the been raised. previous year. Business Human Rights Resource Centre This year, our focus has been on training – improving for the second consecutive Several members of our Executive and raising awareness. Working with year. This is a complex issue, and we’re Team grew up in coldspots, and our expert charity partners, Hope committed to continually reviewing over 50% studied at non-Russell for Justice, we delivered six half-day and improving our approach as our Group universities. workshops for our contract managers, understanding evolves. A key focus for next procurement and construction year is to roll-out a bespoke e-learning project managers. We selected these module. Our full 2018 statement is employees because they have frequent available on the Severn Trent website. and direct engagement with our highest risk area, our supply chain.

Severn Trent Plc Annual Report and Accounts 2019 45 Strategic report

Performance review continued

Re-focusing our portfolio Turning waste into energy Following the sale of our US and Italian We continue to build our track record Business businesses, we’ve now successfully of generating valuable green energy by re-focused on operations in the UK. transforming waste materials and using Services Accordingly we’ve changed the way renewable sources. From food waste we report on our Business Services and crop digestion technologies to wind segment, splitting our performance turbines and solar PVs, our green energy reporting into five areas: assets are reducing our carbon footprint, saving costs and supporting our drive • Bioresources – continuing to generate Our Business Services team made to generate the equivalent of 50% of our green energy from the treatment of good progress in the last year. energy needs by 2020. We established a standalone sewage sludge. We are well positioned Bioresources business ready for for the opening of a new regulatory The period of prolonged hot, dry weather market opening in 2020, expanded environment and competitive market in 2018 increased customer demand our Green Power business with the in 2020. for water which meant we increased our energy usage to treat it and pump it acquisition of Agrivert, and sold • Green Power – generating even more to customers. Nonetheless, we’ve still surplus land that will enable the green energy from a diverse range of been able to boost the amount of energy construction of around 1,000 much renewable technologies including food we self-generate to 43%. And we’re needed homes in our communities. waste, crop, solar, wind and hydro. confident that our continuing investment • Operating Services – we’re continuing in this area will enable us to exceed our to deliver great service to customers target by the end of 2020. such as the Ministry of Defence on Enabled construction of around In November 2018, we acquired our contracts to maintain and operate Agrivert’s operational business for water and waste water assets. £61 million. This brought five food waste 1,000 • Property Development – selling plants into our portfolio, taking our total homes in our communities surplus land that investment in number to eight. We’ve also completed innovation and new technology has the construction of our new food waste allowed Severn Trent Water to free up. facility in Derby, which is the first food waste facility in the UK to incorporate • Other – including Developer Services innovative thermo-pressure hydrolysis and our Property Searches and autoclave technology. This plant will 43% affinity partnership businesses. enable us to take in food waste from Generation of our energy needs a broader range of sources. We were pleased to see the Government release its Resources and Waste Strategy during the year. This sets out its ambition to move to full food waste segregation by 2023 and supports our strategy of further investment in food Food waste plants power waste assets. Our new combined team 60,000 homes – comprising our existing people and The purchase of Agrivert in those who joined us from Agrivert – has November 2018 is a milestone in the a proven track record of working with development of our Green Power councils and businesses in England and business. Before the acquisition, we Wales to win contracts to receive and knew Agrivert well and admired the treat food waste. We’re now well placed company’s expertise and experience, to grow our business in this exciting and having appointed it to provide the design changing market. and engineering for two of our own sites. This close working relationship and shared knowledge was a key factor behind the acquisition. Together, we have the skills and the commercial track record to ensure that our food waste portfolio continues to further drive our excellent progress towards our renewables target.

46 Severn Trent Plc Annual Report and Accounts 2019 > Strategic report Governance Group financial statements Company financial statements Other information

Launched in April 2018, our new Creating new homes and opportunities Delivering for customers standalone Bioresources business is in our communities We’re delighted to be delivering new ideally positioned to operate in the new Established in 2017, our Property water and waste connections better than competitive market, given our central Development Business aims to dispose ever. In Ofwat’s comparative tables we geographical location and the quality of of surplus land which is made available were upper quartile for water and waste, our treatment assets. Our decision to by investment in new technology which and will be pushing to top the tables operate this as a standalone business means we’re now able to operate on a next year. In AMP7, Ofwat is introducing has enabled us to focus on driving smaller footprint than ever before. a new D-MeX measure to assess the improvements along the value chain performance of our Developer Services We have committed to deliver in logistics, treatment, generation team. This will focus on the efficiency £100 million profit for the Group through and disposal. and speed with which we manage water land disposals by 2027. We sold a and waste connections for new homes, During the year, we opened a new substantial portion of land north of offices and industrial developments. Thermal Hydrolysis Plant (‘THP’) at Nottingham, which will enable 831 our biggest sewage treatment works homes to be developed, and surplus at Minworth, near Birmingham, which land in Atherstone, North Warwickshire, treats waste water from over a million which will be brought forward for homes and businesses. THP works by industrial development. We’ve made using heat and pressure to treat sewage significant progress over the last sludge in a similar way to a pressure 12 months, generating a £20 million cooker, and under ideal conditions profit. These profits will be shared with enables extraction of up to 30% more our customers through lower future bills. energy than conventional processes. Our next THP plant is already under In the last two years, our land sales construction at Strongford, near Stoke- have enabled around 1,000 homes on-Trent, with work expected to be to be developed in our communities. completed in 2019. We’re continuing our work with local authorities and developers to create added value for our land for the benefit of our communities, both in residential and commercial markets.

Building a new community In April 2018, we completed a joint land sale with Gedling Borough Council of c.135 acres of land near Stoke Bardolph, Nottinghamshire. The sale enables the development of 831 new homes alongside new leisure areas for the community to use. These include sports pitches, allotments and children’s play areas. There will also be an ecology park, a new community building and a new primary school, all bringing people IMAGES TO SUPPLY and jobs into the area. With planning approval for the first phase of the housing scheme for 199 two, three, four and five bedroom homes including much-needed affordable houses, the developer started on site straight away bringing an estimated 855 jobs to the local area and providing a huge boost to the local economy. The first houses have been completed with new families moving in during March 2019.

Severn Trent Plc Annual Report and Accounts 2019 47 Strategic report

Chief Financial Officer’s review

Growth in underlying PBIT, lower finance Our corporation tax charge for the year costs and a reduction in our effective tax was just below the statutory rate at CFO’s review rate drove a strong increase in underlying 18%, reflecting the fact that some items basic earnings per share of 21.0% to will be taxed in future periods when 145.8 pence per share in the current year. the corporation tax rate falls to 17%. Basic earnings per share from continuing Our cash tax payments were reduced operations were 133.4 pence. by the benefit of tax allowances on our capital programme, contributions to our We have delivered good performance on pension schemes and by the timing of Regulated Equity (‘RoRE’) for the year instalment payments to HMRC under the end 2018/19 which was 8.1%. Whilst this current rules. year’s return was partly held back by reaching our Waste ODI cap, our strong A brief overview of our financial financial performance helped us to an performance for the year is as follows: AMP6 cumulative RoRE of 9.1%, putting • Group turnover from continuing us amongst the very best in the sector, operations was £1,767.4 million with outperformance on all three levers. (2017/18: £1,696.4 million), an increase In line with our dividend policy for the of 4.2%, as RWWW revenue increased remainder of AMP6 of growth of RPI plus by 4.0%, mainly due to the RPI- at least 4% per annum, the proposed linked tariff increases, and growth in James Bowling dividend for the year has increased Business Services’ external turnover. Chief Financial Officer by 7.9%. • Underlying PBIT was up 6.3% to Our funding position continues to be £573.6 million (2017/18: £539.8 million). We have built on our good financial strong, with all our projected investment Underlying PBIT in our RWWW performance in the first half of the year and other cash flow needs covered by business grew by £29.4 million, to deliver a strong set of results for cash or committed facilities through Business Services PBIT grew by 2018/19. Our Regulated Water and Waste to September 2021 and we continue to £0.7 million and Corporate and other Water (‘RWWW’) business delivered good actively monitor and manage our interest growth was £12.8 million. growth in PBIT even after an additional rate exposure. £22 million of operating costs due to • We recorded net exceptional costs of the hot, dry summer and our recovery We completed the acquisition of £9.6 million (2017/18: £12.6 million) after it. In Business Services, strong Agrivert in November 2018 and this arising from the High Court judgment performance in the second half of the has been combined with our Green in the Lloyds Bank case relating to year produced growth both in revenues Power business. Guaranteed Minimum Pension rights. and PBIT for the year as a whole. In May We are committed to paying the right • Reported Group PBIT was up 6.8% to 2018 we announced the sale of surplus amount of tax at the right time. We pay £563.3 million (2017/18: £527.2 million). land near Nottingham, and this, together a range of taxes, including business • Net finance costs were £194.2 million with other smaller disposals later in the rates, employers’ national insurance and (2017/18: £219.5 million). Our effective year, generated property profits for the environmental taxes such as the Climate interest rate of 3.9% was down from Group of £19.9 million. Change Levy and the Carbon Reduction 2017/18 (4.5%) due to: the continued Commitment, as well as the corporation benefit from replacing expensive fixed tax included in our tax charge in the rate debt with new low cost fixed rate income statement. This year we have debt; low interest rates; and reduced published a Tax Report that sets out RPI inflation on our index-linked debt. details of all of the taxes we incur and pay out on our website. £573.6m 145.8 pence £769.3m Underlying Group PBIT1 Underlying Group EPS1 Group cash capex 2017/18: £539.8m2 2017/18: 120.5 pence2 2017/18: £591.0m £563.3m 133.4 pence 63.0% Reported Group PBIT1 Reported Group EPS1 Gearing 2017/18: £527.2m 2 2017/18: 101.8 pence2 2017/18: 60.6%

1 PBIT is profit before interest and tax, underlying PBIT excludes amortisation of acquired intangibles and exceptional items as set out in note 45. 2 Restated for the implementation of IFRS 15, see note 2 a) of the Group financial statements.

48 Severn Trent Plc Annual Report and Accounts 2019 > Strategic report Governance Group financial statements Company financial statements Other information

• Our full effective tax rate was 18.0% Hafren Dyfrdwy (formerly Dee Valley The growth in activity on capital projects and our underlying effective tax Water) was acquired on 15 February 2017 increased the level of own labour rate was 11.6%, down from 12.7% in and integrated into the RWWW segment. capitalised, up £23.2 million on the 2017/18 largely due to higher capital On 1 July 2018, the licences of Severn previous year. allowances from the larger capital Trent Water and Hafren Dyfrdwy were Net hired and contracted costs of programme in the year. amended to align with the national £165.6 million were up £17.9 million boundaries of England and Wales but the (12.1%) primarily in relation to costs Changes to segmental operating activities within the RWWW incurred over the hot, dry summer and segment were unchanged by this. presentation resulting operational recovery activities The following commentary on the RWWW In 2017/18 and prior years, the sludge in the second half of the year. business in both years therefore includes treatment activities of the Bioresources the same activities in each year. Power costs were up £9.9 million to business were managed by, and £105.8 million, driven by higher pass- included in, RWWW. The renewable Turnover increased by 4.0% to through costs as forecasted, and a energy generating activities of the £1,637.6 million. The components of higher demand for water during the Bioresources business were managed this were: summer. The Group manages its power by, and included in, Business Services. • RPI and the K factor increased revenue costs through a combination of demand These activities are now managed as by £55.7 million; management, self-generation and a single Bioresources business within forward price contracts. Business Services. • Customer ODI rewards taken in the current year were £9.6 million lower Our bad debt charge decreased by Implementing innovative treatment than the previous year; £0.2 million this year, and represented techniques and finding ways to use our 2.0% of household revenues resources more effectively enables • The reduction in from the Wholesale (2017/18: 2.2%). We continued to improve us to free up land for development. Revenue Forecasting Incentive the pace of collection for new debt The profits of this activity are shared Mechanism was £13.9 million more but also experienced slightly slower between the regulated and non- favourable than the previous year; recovering of older debt, which we are regulated businesses through the initial • Additional revenue from the higher actively targeting our efforts on this year. transfer price and overage agreements consumption during the hot weather relating to the development potential. Other costs decreased by £7.1 million to was around £5 million; and In 2017/18 and prior years, the gains £185.8 million, following increased profit from the property development activity • Other small factors reduced revenue on the disposal of tangible assets (mainly attributable to the regulated business by £2.2 million. property) during the year. were reported in RWWW and those Net labour costs of £134.4 million were Infrastructure renewals expenditure of relating to the non-regulated business £7.4 million (5.2%) lower. Gross employee £141.1 million was £6.2 million higher were reported in Corporate and other. costs increased by 5.8%, due to the in the year. The increase was driven by All of these activities are now managed annual pay award and the continuation of additional activity to reduce leakage and reported as a single business within our strategy to bring more work in-house and an acceleration of our trunk mains Business Services. (including the new design team). renewal programme. The segmental analysis that follows and in the financial statements shows: • current period performance on the new and old basis; and Regulated Water and Waste Water – Underlying PBIT • comparative information on the old basis. £600m Comparative information for the new 63.0 (10.5) segments is not available and the cost to (9.9) develop it would be excessive. All year- 0.9 0.2 (14.3) on-year comparisons are on the old 544.3 (8.7) segmental basis. Please see note 5 in £550m (8.6) the Group financial statements for a 527.0 reconciliation from the old to the new 514.9 segmental basis. Regulated Water and Waste Water £500m Turnover for our RWWW was £1,583.1 million and underlying PBIT was £527.0 million on the new reporting basis. On the old basis turnover was £450m 2018 Turnover Net labour Power Other Bad Depreciation 2019 Bioresources Property 2019 (old basis) and H&C costs and debt (old Development (new £1,637.6 million (2017/18: £1,574.6 million) costs infrastructure basis) basis) and underlying PBIT was £544.3 million renewals (2017/18: £514.9 million).

Severn Trent Plc Annual Report and Accounts 2019 49 Strategic report

Chief Financial Officer’s review continued

Depreciation of £334.8 million was In the Renewable Energy business, In 2017/18 the exceptional charge of £14.3 million higher than the prior year, turnover increased by 20.2% and £12.6 million comprised exceptional partly driven by the shift towards more underlying PBIT increased by 6.5%. restructuring costs of £20.9 million investment in technology assets with Higher energy prices contributed to the preparing our Bioresources business shorter lives. There was also an increase increase together with the expansion of for AMP7 and an exceptional in abandonment charges of £5.4 million as our crop energy plant near Nottingham; gain of £8.3 million from the net we upgraded some of our ageing assets. the impact of a full year of operations for benefit of a Pension Increase our West Birmingham food waste plant; Exchange arrangement. Return on Regulated Equity (RoRE) and, the purchase of Agrivert (a food waste Net finance costs RoRE is a key performance indicator for company acquired in November 2018), the regulated business and reflects our which contributed £9.2 million of revenue Our net finance costs for the year were combined performance on Totex, customer and £1.6 million of underlying PBIT. £194.2 million, £25.3 million lower than ODIs and financing against the base return Corporate and other the prior year. The reduction was driven allowed in the Final Determination. by a lower effective interest rate as a Corporate overheads of £13.4 million result of recent low cost fixed debt issues Severn Trent Water’s RoRE, calculated (2017/18: £8.9 million) included and lower RPI inflation on our index- in accordance with Ofwat’s guidance, for £3.6 million acquisition costs for linked debt (down £14.5 million), which the year ended 31 March 2019 and for the Agrivert. Our other businesses generated more than offset the impact of higher four years ended on that date is set out in a net profit of £11.7 million (2017/18: average net debt. the following table: loss of £0.8 million) including a profit of Our effective interest rate was 3.9% £11.3 million from Property Development (2017/18: 4.5%) and our effective cash AMP6 (2017/18: £2.1 million), which is included 2018/19 to date cost of interest (excluding the RPI uplift % % in Business Services on the new basis. on index-linked debt and pensions- Base return 5.6 5.6 related charges) was also down to 3.1% Outperformance Exceptional items before tax (2017/18: 3.4%). Net pension finance costs Totex – 1.2 We recorded a net exceptional charge were broadly in line with the previous ODIs (0.1) 1.0 of £9.6 million (2017/18: charge of year. Capitalised interest of £33.2 million Financing 2.6 1.3 £12.6 million). increased by £7.4 million year-on-year Regulatory return for the year 8.1 9.1 On 25 October 2018 the High Court issued due to the higher level of capital activity a judgment in the Lloyds Bank case in in the year. Our earnings before interest, relation to gender equality in Guaranteed tax, depreciation and amortisation We have delivered RoRE of 8.1% in the year Minimum Pension rights that has an (EBITDA) interest cover was 5.1 times thanks to our significant outperformance impact on the Group’s defined benefit (2017/18: 4.3 times) and PBIT interest on financing. ODIs were broadly neutral, pension liabilities. We have obtained cover was 3.2 times (2017/18: 2.6 times). impacted by hitting the Waste cap of 2% of independent advice from the Group’s See note 18 for further details. RoRE. We reinvested Totex savings for the actuaries to determine the amount of benefit of our customers so performance the additional liability and have made was flat here as well. Our cumulative provision for our best estimate in this AMP6 RoRE remains strong at 9.1%, with year’s financial statements. four-year outperformance broadly based from sustained customer service, delivery on ODIs, early delivery of Totex efficiencies and strong performance on financing. Business Services – Turnover and Underlying PBIT Business Services 100% Business Services turnover was £200.9 million and underlying PBIT was £64.1 million on the new basis. 80% Operating Services The division delivered growth in revenues Green Power/Renewable Energy (up 3.8%) and underlying PBIT (up 2.0%) 60% on a comparable basis. The prior year figures have been restated to reflect the Bioresources impact of the implementation of IFRS 15 40% Property Development on the recognition of revenue and costs for the MOD contract (see note 1). Other 20% In our Operating Services business, turnover and underlying PBIT decreased by £6.8 million and £0.6 million 0% respectively. An improvement in Turnover PBIT performance on our HomeServe contract The chart shows the relative contribution of the various businesses to Business Services Turnover was offset by lower rechargeable activity and Underlying PBIT. on our MOD contract and additional costs as a result of the hot, dry summer. 50 Severn Trent Plc Annual Report and Accounts 2019 > Strategic report Governance Group financial statements Company financial statements Other information

Taxation Taxes borne We are committed to paying the right amount of tax at the right time. As well as corporation tax on profits, which is included in the tax charge £160m in our accounts, we incur a range of taxes, charges and levies imposed by Corporation tax government agencies, as shown in the £120m chart to the right. Further details on the Business rates and property taxes taxes and levies that we pay are included in our Tax Report which is available on Employer’s National Insurance our website. £80m The corporation tax charge for the year Environmental taxes recorded in the income statement was £69.4 million (2017/18: £61.6 million) £40m Other taxes and we made net corporation tax payments of £21.3 million in the year (2017/18: £6.5 million). The difference 0 2018 2019 between the tax charged and the tax paid is summarised in the chart below.

Reconciliation of tax charge to tax paid

£80.0m 69.4 (37.6)

£60.0m

£40.0m (9.7) 9.4 31.5 (15.9)

5.7 21.3 15.6 £20.0m

0 Tax on proﬁt Tax effect Current tax Overprovisions Corporation Payable by Instalments Payments Net tax on ordinary of timing credits recorded in previous tax payable instalments paid in relating paid in shares differences in Other years for the year next year the year to last year the year Comprehensive Income or Equity

Note 13 in the Group financial statements UK tax rules specify the period over Profit for the year and earnings sets out the tax charges and credits in which tax relief can be obtained for per share the period, which are described below. capital expenditure. Typically this is a shorter period than that over which the Profit for the year from continuing The current tax charge for the year was assets are depreciated in the accounts operations increased by 32% to £31.8 million (2017/18: £32.9 million) and and this tends to reduce the corporation £315.3 million (2017/18: £239.6 million). the deferred tax charge was £37.6 million tax charge in the year and the Group (2017/18: £28.7 million). There were no discontinued operations in underlying effective current tax rate. the year (2017/18: profit of £13.2 million). Our full effective tax rate this year was We make provision for tax that will be Total profit for the year including 18.0% (2017/18: 20.5%), which is lower paid in future periods when the tax relief discontinued operations in 2017/18 than the UK rate of corporation tax (19%), on the capital expenditure has been was £252.8 million. reflecting the fact that some of the items received and we receive no allowance for in our income statement will be taxed in the depreciation charge arising from that Basic earnings per share from future periods when the UK corporation expenditure. This is the most significant continuing operations increased by 31.0% tax rate falls to 17%. component of our deferred tax position. to 133.4 pence (2017/18: 101.8 pence). Underlying basic earnings per share Our underlying effective current tax rate was 145.8 pence (2017/18: 120.5 pence). was 11.6% (2017/18: 12.7%) (see note 45). For further details see note 15.

Severn Trent Plc Annual Report and Accounts 2019 51 Strategic report

Chief Financial Officer’s review continued

The estimated fair value of Movement in net debt debt at 31 March 2019 was £1,219.6 million higher than book value (2018: £1,184.3 million higher). £(6,000)m (36) 5,834 The increase in the difference to book (183) value is largely due to the decrease in (212) 10 the discount rates applied, driven by (114) lower prevailing market interest rates. £(5,500)m (5,356) 826 (769) We continue to carefully monitor market conditions and our interest rate £(5,000)m exposure. Given the flatness of the yield curve we believe it is appropriate to start reducing our exposure to floating £(4,500)m rates of interest. At 31 March 2019 53% of our debt was at fixed rates, 22% was in floating and 25% was index-linked. To that end we have: £(4,000)m Opening Cash Net Purchase Dividends Net issue Net Non-cash Closing net debt generated capital of paid of shares interest movements net debt from expenditure subsidiaries and tax paid • raised £200 million at competitive fixed operations rates at the end of the financial year; • since the year end, cancelled £575 million of pay floating interest Movement in net debt 1 rate swaps that had a positive market We generated £826.3 million cash from value; and operations (2017/18: £773.3 million). • used the proceeds of the cancellations Operating cash flows were higher mainly to cancel £100 million of expensive pay due to higher PBIT, depreciation and fixed swaps with an average fixed rate amortisation and our increase in working of 5%. capital was lower than the previous year. 3 These actions reduced our floating rate Our biggest year of capital investment in exposure to around 15% of gross debt at a decade led to net capital expenditure of the end of April 2019. £769.3 million (2017/18: £591.0 million). The acquisition of Agrivert resulted in a Treasury policy and operations net cash outflow of £50.9 million and we also repaid £63.0 million of debt that was Our principal treasury management acquired with the business. 2 objectives are: Our net interest payments were lower at 1. Fixed £2,663m • to access a broad range of sources of £161.6 million (2017/18: £182.1 million). 2. Floating £1,543m finance to obtain both the quantum and Tax payments were £21.3 million, an 3. Index linked £1,464m lowest cost compatible with the need increase of £14.8 million. The previous for continued availability; year benefited from a reduction of • to manage our exposure to movements £8 million from overpayments in Our long term credit ratings are: in interest rates to provide an earlier years. appropriate degree of certainty as to Standard our cost of funds; We received £10.0 million net Long term ratings Moody’s and Poor’s (2017/18: £5.6 million) in relation to Severn Trent Plc Baa1 BBB • to minimise our exposure to employee share schemes and our counterparty credit risk; dividends paid increased by 7.6% Seven Trent Water A3 BBB+ in line with our policy. Outlook Negative Stable • to provide an appropriate degree of certainty as to our foreign These cash flows, together with exchange exposure; accounting adjustments to the carrying value of debt, resulted in an Net debt • to maintain an investment grade credit increase of £477.5 million in net debt rating for our regulated subsidiary Net debt at 31 March 2019 was (2017/18: £274.2 million). Severn Trent Water Limited; and £5,834.1 million (2018: £5,356.6 million) At 31 March 2019 we held £39.6 million and balance sheet gearing (net debt/net • to maintain a flexible and sustainable (2018: £38.5 million) in net cash and debt plus equity) was 83.3% (2018: 84.4%). balance sheet structure. cash equivalents. Average debt maturity Group net debt, expressed as a percentage We invest cash in deposits with was around 14 years (2018: 15 years). of estimated Regulatory Capital Value at highly rated banks and liquidity Including committed facilities, our cash 31 March 2019 was 63.0% (2018: 60.6%). funds. We regularly review the list flow requirements are funded until of counterparties and report to the September 2021. Treasury Committee.

52 Severn Trent Plc Annual Report and Accounts 2019 > Strategic report Governance Group financial statements Company financial statements Other information

Our treasury affairs are managed centrally and in accordance with our Pensions Treasury Procedures Manual and Policy Statement. Group Treasury’s role is to manage liquidity, funding, investment £(600)m and our financial risk, including risk from volatility in interest and (to a lesser extent) currency rates and (13.8) 57.9 £(550)m (9.6) (2.3) counterparty credit risk. The Board (519.8) (0.2) determines matters of treasury policy and its approval is required for certain treasury transactions. The Board has £(500)m 34.9 established a Treasury Committee to monitor treasury activities and to (452.9) facilitate timely responses to changes £(450)m in market conditions when necessary. Our strategy is to access a broad range £(400)m At 1 April Current Exceptional Scheme Net Acturial Contributions At 31 March of sources of finance to obtain both 2018 service past administration interest (losses)/gains from 2019 costs service costs costs cost sponsoring the quantum required and lowest cost employers compatible with the need for continued availability. Our principal operating subsidiary, Severn Trent Water, is a Pensions Hafren Dyfrdwy participates in the long-term business characterised by Dee Valley Water Limited Section of multi-year investment programmes. We have three defined benefit pensions the Water Companies Pension Scheme Our strategic funding objectives reflect arrangements, two from Severn Trent (‘the Section’). The Section funds are this and the liquidity position and and one from Dee Valley Water. administered by trustees and are held availability of committed funding are The Severn Trent schemes are closed separately from the assets of the Group. essential to meeting our objectives to future accrual. The Section is closed to new entrants. and obligations. We therefore aim for The most recent formal actuarial The most recent formal actuarial a balance of long-term funding and valuations for the Severn Trent schemes valuation of the Section was completed commitment of funds across a range (‘the Schemes’) were completed as at as at 31 March 2017 and as a result of funding sources at the best possible 31 March 2016. The agreement reached deficit reduction contributions to the economic cost. The Group also seeks with the Trustee for the Severn Trent Section ceased. to maintain an investment grade credit Pension Scheme (‘STPS’), which is by far rating and a flexible and sustainable On an IAS 19 basis, the net position the largest of the schemes, included: balance sheet structure. (before deferred tax) of all of the • Inflation-linked payments of Group’s defined benefit pension We use financial derivatives solely to £15 million per annum through an schemes was a deficit of £452.9 million manage risks associated with our normal asset-backed funding arrangement, (2018: £519.8 million). To calculate the business activities. We do not hold or potentially continuing to 31 March pension deficit for accounting purposes, issue derivative financial instruments for 2031, although these contributions we are required to use corporate bond financial trading. will cease earlier should a subsequent yields as the basis for the discount rate Except for debt raised in foreign currency, valuation of the STPS show that these of our long-term liabilities, irrespective which is fully hedged, our business does contributions are no longer needed; of the nature of the scheme’s assets or not involve significant exposure to foreign their expected returns. • Payments under another asset-backed exchange transactions. funding arrangement of £8.2 million On an IAS 19 basis, the funding level has The Group issues notes in foreign per annum to 31 March 2032; and improved to 84% (31 March 2018: 82%). currency under its EMTN programme and • A deficit reduction payment of uses cross currency swaps to convert Accounting policies and £10 million for each of the three the proceeds to sterling. The effect presentation of the financial financial years ending 31 March 2019. of these swaps is that interest and statements principal payments on the borrowings are In addition to these payments, the Our Group financial statements denominated in sterling and hence the Company will directly pay the annual are prepared in accordance with currency risk is eliminated. The foreign Pension Protection Fund levy incurred by International Financial Reporting currency notes and the cross currency the STPS (£1.4 million in 2018/19). Standards that have been endorsed swaps are recorded in the balance sheet The next formal actuarial valuations of by the European Union. The Company at their fair values and the changes in the Schemes are currently underway. financial statements are prepared in fair values are taken to gains/(losses) accordance with FRS 101. on financial instruments in the income The Schemes have entered into additional statement. Since the terms of the swaps hedging arrangements to reduce the closely match those of the underlying impact of fluctuations in interest rates notes, such changes tend to be broadly and inflation on the Schemes’ liabilities equal and opposite. without adversely impacting the expected return from the Schemes’ assets. Severn Trent Plc Annual Report and Accounts 2019 53 Strategic report

Risk management

In our non-regulated businesses we Risk appetite take a more commercial approach Our to risk. In providing products and The Board keeps the relationship services for clients who operate in between our strategic ambitions regulated environments, we take a and the management of risk under approach similar approach to risk as in our own continual review. regulated business. The ERM process establishes target to risk The principal risks facing the Company risk positions for each of our significant are illustrated on pages 56 to 61. risks. The Board formally discusses the progress towards this position and Risk is all about uncertainty. Our Enterprise Risk the mitigating actions being undertaken We recognise that uncertainty can every six months. manifest itself as both negative Management process and positive impacts. Our goal is to We use an established ERM process Financial risks minimise the threats and maximise across the Group to assess and manage Like all businesses, we plan future the opportunities for the benefit of our our significant risks. The process is funding in line with business need. customers, shareholders, employees, controlled by the central ERM team and This is part of our normal business supply partners and the environment. underpinned by standardised tools and planning process. methodology to ensure consistency. The Board has overall accountability The Board receives regular updates for ensuring that risk is effectively ERM champions and co-ordinators relating to funding, solvency and liquidity managed across the Group. The Board’s operate throughout the business, matters through the Treasury Committee mandate includes defining risk appetite with support and challenge from the so we can respond quickly to any and monitoring risk exposure to ensure ERM team, continually identifying changes in our ability to secure financing significant risks are aligned with the and assessing risks in their business (see Principal Risk 10). The Pension overall strategy of the Group. units and reporting on a quarterly Fund Trustees and Company regularly basis. Criteria are used to consider the On behalf of the Board, the Audit monitor our pension deficit, with advice likelihood of occurrence and potential Committee assesses the effectiveness of from investment managers and actuarial financial and reputational impacts. the Group’s Enterprise Risk Management advisers. An annual pension fund review The potential causes and subsequent (‘ERM’) process and internal controls to paper is tabled to the Board, updating impact of the risks are documented identify, assess, mitigate and manage them on fund performance and proposed to enable mitigating controls to be risk. Additional information is set out in initiatives to manage down pension assessed. This assessment allows the Audit Committee report on page 91. liabilities and further balance pension us to put in place effective strategies risks (see Principal Risk 9). The Executive Committee reviews to remediate defective controls or strategic objectives and assesses the implement additional controls. The ERM process and relevant risk level of risk taken in achieving these assessments are factored into the Business unit information is combined to objectives. This ‘top down’ risk process ‘stress testing’ to assess the Group’s form a consolidated view of risk across helps to ensure the ‘bottom up’ ERM prospects as part of our Long Term the Group – with risks being prioritised. process, described below, is aligned to Viability Statement. Our significant risks form our Group risk current strategy and objectives. profile which is reported to the Executive Sustainability risks The management of risk is embedded Committee for review and challenge. in our everyday business activities. This is reported to the Audit Committee Sustainability risks are treated in the Across the Group, we manage and Board on a six monthly basis. same way as all our other company risks, risks within the overall Governance The report provides an assessment captured at a local level by responsible Framework which includes clear of the effectiveness of controls over teams and managed centrally through accountabilities, delegated authority each risk and an action plan to improve our established ERM process. By the limits and reward policies. These are controls where necessary. nature of what we do, several of our designed to provide employees with principal risks have a sustainability To further enhance our ERM a holistic view of effective focus, and we monitor our social and information, we report ‘risk flightpaths’. risk management. environmental impacts with the same These demonstrate the level of risk the rigour as our broader performance. Within Severn Trent Water and Hafren Group faces and the timeline for the key Dyfrdwy, our approach to risk reflects risk mitigation steps to manage the risk our status as a regulated utility providing to the target position. The flightpaths essential services and operating as part help to facilitate a more thorough review of the Critical National Infrastructure for of the target risk positions, consider risk the UK. The nature of these businesses appetite and assess whether actions are is such that there are some significant on target with the correct prioritisation inherent risks. We have a strong control in place. framework in place to enable us to In addition, individual risks and specific understand and manage these risks risk topics are also discussed by the in accordance with our risk tolerance Board during the year. and appetite.

54 Severn Trent Plc Annual Report and Accounts 2019 > Strategic report Governance Group financial statements Company financial statements Emerging risks Other information

Emerging risks have the potential to Our ERM process ensures emerging increase in significance and affect the risks are identified and aids the Audit Emerging performance of the Group and, as such, Committee and Board’s assessment are continually monitored through our of whether the Group is adequately existing ERM processes comprising: prepared for the potential opportunities risks ERM co-ordinators, ERM champions and threats they present. The process and risk owners and cross functional enables new and changing risks to be workshops that operate at all levels identified at an early stage – so we can of the organisation. We also use tools analyse them thoroughly and assess such as horizon scanning and PESTLE potential exposure. We define emerging risks as analysis. The outputs of this process We closely monitor emerging risks and upcoming events which present are reported to the Audit Committee with time they may become fully fledged uncertainty but are difficult to and Board through our emerging risk ERM risks or be incorporated into assess at the current stage. horizon map. existing ERM risks (as potential causes) as we learn more. Emerging risks may also be superseded by other risks or cease to be relevant as the internal and external environment in which we operate evolves. A non-exhaustive list of some current emerging risks of relevance to the Group are set out below.

Title Detail Area / Factor Time Horizon Short Medium Long Macroeconomics Increased macroeconomic Economic uncertainty post Brexit.

Compliance The challenge of compliance in a more Legal & Regulatory complex, disaggregated regulatory framework for AMP7 and beyond.

Automation, Opportunity for increased efficiency Technological robotics and AI through use of automation, robotics and artificial intelligence.

Water industry Increasing social and political pressure Political & Social structure on the structure of the water industry.

Micro Understanding and addressing the Health, Safety & plastics impact of micro plastics – including on Environmental natural resources and customers.

HS2 Direct impact on operational sites along Operational the proposed route and the indirect impact on labour availability in the area.

Skills gap and Shortage of STEM expertise within the Operational labour shortage labour market and future talent pipelines. We are addressing this through our new Training Academy. Read more on page 28. Rising energy costs Opportunity to increase renewable energy Technological generation and efficiency as technology develops. Read more on our investment in renewable energy technology on page 46.

Severn Trent Plc Annual Report and Accounts 2019 55 Strategic report

Principal risks

The Directors have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. These have been categorised across: • Customer perception; • Legal, regulatory and political environment; • Operations, assets and people; and • Financial risks. For each risk we state what it means for us and what we are doing to manage it.

Customer perception

What is the risk? 1 What does it mean for us? We may be unable to improve and We are a regulated utility providing essential services to our customers. We recognise that our customers increasingly expect more from us and demand an improved and more consistent maintain our levels of customer experience. As other industries improve their levels of service, the bar continues to be raised. service sufficiently to deliver what Failure to deliver the service that customers expect will lead to customer dissatisfaction. our customers tell us they want. This may result in financial penalties under Ofwat’s Service Incentive Mechanism (SIM) in AMP6, and C-MeX in AMP7, and associated ODI outturn.

Which part of Severn Trent What are we doing to manage the risk? is affected? Understanding what our customers want is key to managing this risk. Our PR19 Severn Trent Regulated Water and Waste Water businesses plan was shaped by consulting with 32,000 customers, evaluating 24,000 complaints and considered 1.9 million customer views. As one of only three companies to be fast-tracked we see Link to How We’re Achieving this as a firm endorsement of our customer-focused approach. our Strategy We recognise that our performance on SIM has not been where we would have wanted. Work is Embed customers at the heart of all we do now underway to prepare for Ofwat’s new AMP7 customer measure of performance (‘C-MeX’), which will be partly based on customer contact, as with SIM, and partly on customer perception Link to our Values which is a much wider measure. We are pleased to again be in the top quartile of water companies in England in the UK Customer Service Index, especially as this is an element of the We put our customers first forthcoming C-Mex measure. We are passionate about what we do The Retail Upper Quartile (‘UQ’) programme continues to deliver a number of initiatives focused We act with integrity on customer experience. Future initiatives include ‘Customer First’ interventions and Robotics Process Automation. Customers continue to tell us they are delighted when we are able to ODIs complete issues for them at Point of Contact and we will continue the work to improve our Point 24-27 of Contact resolution further (with a large focus in metering) to improve the overall experience. We set up Tap Chat during the year. This new online community panel gives us feedback about how we’re doing and, more importantly, how we can do even better. With 15,000 active participants, representing all walks of life and areas across our region, Tap Chat played an important role in refining our PR19 business plan and provides ongoing engagement with our customers. More than 1.9 million customers are now signed up to our online offerings and, during the last year, our web self-serve platform handled more than 1.6 million transactions. And the hard work of our customer communication team was recognised by a Silver Award at the European Contact Centre and Customer Service Awards.

Movement in Net Risk Exposure

Key: Increase in net risk exposure No change in net risk exposure Decrease in net risk exposure

56 Severn Trent Plc Annual Report and Accounts 2019 > Strategic report Governance Group financial statements Company financial statements Other information

Legal, regulatory and political environment

What is the risk? 2 What does it mean for us? We may be unable to The regulated business operates in a highly regulated environment. Whilst we are broadly content with the direction of changes proposed for our industry, there remains a risk that additional future changes effectively anticipate could have a significant impact on Severn Trent. The renationalisation of the water industry continues and/or influence future to be a central policy of the Opposition and therefore remains a possibility in the event of a change of developments in the UK Government. In the event of renationalisation, there is a possibility that the Group’s regulated businesses (Severn Trent Water and Hafren Dyfrdwy) are acquired at below the value currently implied in Severn water industry resulting Trent Plc’s share price. in our business plans becoming unsustainable. What are we doing to manage the risk? With the successful submission of our PR19 Severn Trent Plan we now have more certainty about the next five year AMP period running from 2020-25. Which part of Severn Trent Severn Trent has always contributed to the debate about our industry’s future. We will continue to be is affected? an active participant in these conversations, so we can help shape thinking about how to best serve our Regulated Water and Waste customers in the future. Water businesses We specifically continue to engage with the Government, MPs, the Welsh Government, regulators and other stakeholders about the future shape and direction of the water sector. The renationalisation of the Link to How We’re Achieving water industry remains a possibility in the event of a change of Government, and any associated changes our Strategy in Government policy may fundamentally impact our ability to deliver the Group’s strategic objectives, impacting shareholder value. Our aim is to ensure the water sector in England and Wales continues to Change the market for the better deliver a world class service for customers, is able to invest for the future and maximises the benefits to Investing responsibly for wider society all stakeholders through the social and environmental benefits the current model allows us sustainable growth to deliver. We seek to minimise potential risk and maximise opportunities through regular communication and robust scenario planning as Government policy evolves. ODIs Creating our Welsh business Hafren Dyfrdwy has aligned our interests around the England-Wales border n/a along national boundaries, with all customers in Wales now being served by the new business – bringing clarity to the water market in the region.

Movement in Net Risk Exposure

3 What is the risk? What does it mean for us? The regulatory landscape Our policies and processes must reflect the current legal and regulatory environment and all relevant employees must be kept aware of new requirements. The Group, as a whole, may face censure for non- is complex and subject to compliance in an individual Group company or a specific region in which we operate. ongoing change. There is a What are we doing to manage the risk? risk that processes may fail We have established governance and control frameworks that we openly publish to provide transparency. or that our processes may Our engagement with customers and stakeholders, policies, internal controls, guidance and training not effectively keep pace ensure our ongoing compliance with all applicable laws and regulations including Competition Law for the operation of separate Wholesale and Retail business and between our Group businesses. with changes in legislation We regularly review our control frameworks to take account of changes to legislation, regulation and our leading to the risk of non- business. This year we have updated to include the new boundaries of Severn Trent and Hafren Dyfrdwy. compliance. Ensuring compliance with the General Data Protection Regulation (‘GDPR’) has also been a key area of focus since they came into effect on 25 May 2018. Which part of Severn Trent Changes to the legal and regulatory environment are captured as ‘emerging risks’ through our ERM process with the necessary owners and actions identified to ensure compliance when the changes is affected? come into effect. More detail on our emerging risks can be found on page 55. Our external legal advisers Group-wide also provide us with horizon scanning reviews of upcoming legislation that may affect the Group. This is considered by our internal legal team, and any applicable upcoming changes are reported to the Link to How We’re Achieving Executive Committee and Board with communication across the business as required. our Strategy Drive operational excellence and Movement in Net Risk Exposure continuous innovation Change the market for the better Investing responsibly for sustainable growth Link to our Values We act with integrity We protect our environment ODIs 1-4, 19-23, 30-43

Severn Trent Plc Annual Report and Accounts 2019 57 Strategic report

Principal risks continued

Operations, assets and people

What is the risk? 4 What does it mean for us? We may experience loss of The risks arising from loss of one or more of our major systems or corruption of data held in those systems could have far reaching effects on our business. We have recognised data or interruptions to our the increasing threats posed by the possibility of cyber attacks on our systems and data. key business systems as Whilst this threat can never be eliminated and will continue to evolve, we are focused on the need a result of cyber threats. to maintain effective mitigation. What are we doing to manage the risk? Which part of Severn Trent We continue to commit significant resources and financial investment to maintain the integrity is affected? and security of our assets and data. We follow guidance from the National Cyber Security Centre Group-wide and have defence through multiple layers of software and processes including web gateways, filtering, firewalls, intrusion and advanced threat detection. We have strengthened our security Link to How We’re Achieving and network operations capability this year and have improved the controls around third party access to our systems and data. We have reviewed our cyber risk methodology and are using our Strategy this to prioritise future investment to ensure that we protect ourselves in line with the General Embed customers at the heart of all we do Data Protection Regulation (‘GDPR’), Network and Information Systems Regulation and Payment Drive operational excellence and Card Industry Data Security Standard best practices. We have also participated in a number of continuous innovation internal cyber security incident exercises to test our response capability to cyber attacks. John Coghlan is our designated Non-Executive Director in respect of cyber risk. Link to our Values Despite the enhancement of our defence during the year, considering current cyber threat levels We put our customers first we have recognised an overall increase in the net risk exposure.

ODIs Movement in Net Risk Exposure 1-4, 5-18, 19-23, 24-27

What is the risk? 5 What does it mean for us? We may fail to meet our regulatory If we are unable to meet operational performance targets, we may be subjected to significant targets including targets from regulatory penalties within the current price review period, or applied to the next price review. Regulatory targets apply to all of our water treatment, distribution, sewerage and sewage Ofwat in relation to operational treatment assets. Measures are in place in relation to water quality, continuous supplies, performance of our assets sewer flooding, sewer collapses and pollution events. resulting in regulatory penalties. What are we doing to manage the risk? Our strong wastewater performance has continued and we have made good progress on water Which part of Severn Trent quality, but further work is required to improve our performance for supply interruptions is affected? and leakage. Regulated Water and Waste Water businesses We are starting to see improvement in supply interruptions through our ‘Prevent, Restore, Repair’ strategy which focuses on preventing asset failure where possible, and restoring Link to How We’re Achieving supply at speed if this happens. On leakage, we have introduced innovative ways of finding leaks our Strategy faster and fixing them more efficiently, and we are pleased that we have started to see some encouraging results. Embed customers at the heart of all we do We use leading measures on our comm cells and performance meetings to track delivery Drive operational excellence and against customer ODIs and performance commitments so that we can intervene in a timely continuous innovation fashion if performance is drifting. Investing responsibly for sustainable growth Movement in Net Risk Exposure Link to our Values We put our customers first We are passionate about what we do We protect our environment ODIs 1-45

Key: Increase in net risk exposure No change in net risk exposure Decrease in net risk exposure

58 Severn Trent Plc Annual Report and Accounts 2019 > Strategic report Governance Group financial statements Company financial statements Other information

What is the risk? 6 What does it mean for us? Failure of certain key assets Some of our assets are critical to the provision of water to large populations for which we require an or processes may result alternative means of supply. Examples of risk include the failure of one of our reservoirs or water treatment works. These assets in an inability to provide a are regularly inspected and maintained and our assessment of the overall condition of these assets continuous supply of clean is good. water and safely take waste Other examples are our IT, telephony systems and remote monitoring systems which are also key to water away within our area. our operations. What are we doing to manage the risk? Which part of Severn Trent Our business plan for 2015-2020 includes considerable investment in our assets to improve the is affected? resilience of our networks, reduce interruptions and improve the service that our customers receive. There are areas where our performance is not as consistent as we would like and we are committed to Group-wide improving these. Link to How We’re Achieving We are continuing our Cleanest Water Plan which drives the delivery of our inspection, cleaning and our Strategy repair of storage tanks, increasing our capital maintenance interventions, optimising our operation and maintenance tasks and formalising our processes, standards and operating procedures involved in Embed customers at the heart of all delivering clean water. we do We have applied the learnings from the Freeze Thaw event in March 2018 and this informed our Drive operational excellence and preparations for the prolonged hot, dry summer – which saw a 22% increase in demand for water from continuous innovation our customers at peak times. Several rural areas experienced intermittent supply interruptions and we Investing responsibly for are investing across the network to avoid such issues in the future. Our response to failures in supply, sustained growth such as burst mains, has been greatly enhanced and we are now able to reach the site and initiate recovery plans much quicker than in previous years. Link to our Values We have a programme of work to improve the reliability of our major Water Treatment Works and to We put our customers first return them to their design output capacity where they have not been in a condition to meet it. We are passionate about what we do In Nottinghamshire, we made great progress on a scheme to improve our service in Newark, where a £60m programme will benefit 400 local homes and businesses. We’re installing 4 km of high volume ODIs sewers to reduce flooding risk, as well as 10 km of new water network to improve water supply. 1-4, 5-18, 19-23 In addition to investing in resilience improvements to our network we also have assurance plans in place to monitor, inspect and maintain our most critical assets and to ensure clean water is always available to our customers and we will always be able to safely take their waste water away.

Movement in Net Risk Exposure

What is the risk? 7 What does it mean for us? Due to the nature of our The nature of our assets, operations and business are such that threats to the safety of our employees, contractors, customers and the wider public exist. Operational failures or negligence could result in operations we could endanger damage to the environment. the health and safety of our We are responsible for a large estate of assets and have to secure these from unauthorised access to people, contractors and ensure our operations are not impacted nor the safety of the public compromised. members of the public as well as negatively impact our local What are we doing to manage the risk? We have a well established Health, Safety and Wellbeing Framework to ensure all of our operations and wider environment. and processes are conducted in compliance with Health and Safety legislation and in the interests of the safety of our people and our contractors. Our Goal Zero policy clearly sets out our target that no one should be injured or made unwell by what we do. We experienced no major safety incidents and no Which part of Severn Trent fatalities in the last 12 months, but we did see an increase in Lost Time Incidents (‘LTI’s), mainly due to is affected? slips, trips and falls. We have refreshed our strategy and have targeted interventions in the four main Group-wide hazard areas causing us most harm. More detail can be found on page 45. There are a number of ODI commitments we have made to protect our local environment, including Link to How We’re Achieving the river water quality, pollution incidents, biodiversity improvements and environmental compliance. our Strategy In AMP6 we will be delivering our largest ever environmental programme. This programme is supported by our customers who want to see us do more to improve river water quality. As part of the Drive operational excellence and Water Framework Directive we’re on track to improve at least 1,600 km of our rivers in AMP6 – and a continuous innovation further 2,100 km in AMP7. This year we expect to receive a 3* Environmental Performance Assessment Investing responsibly for sustained growth status from the Environmental Agency. Create an awesome place to work We recognise the impact our operations have on the wider environment and we want to reduce our carbon footprint by seeking lower carbon ways of operating our business, driving energy efficiency Link to our Values and generating renewable energy. We’ve made excellent progress against our target of generating the We protect our environment equivalent of 50% of our own energy requirements, with the completion of a Thermal Hydrolysis Plant at our Minworth waste water site during the year. During the year we were re-certified by the Carbon Trust We act with integrity – the tenth consecutive year we have achieved this standard. This verifies that we have sound carbon management processes in place and are reducing carbon emissions year-on-year. More details can be ODIs found in our Corporate Responsibility Report on page 94. 30-41, 42-43 Movement in Net Risk Exposure

Severn Trent Plc Annual Report and Accounts 2019 59 Strategic report

Principal risks continued

What is the risk? 8 What does it mean for us? We are unable to deal with Climate change (hotter and drier summers, wetter winters and increased storminess) could result in an inability to meet customer demand, lower river levels, decreased raw water quality, the impact of extreme and flooding of our water or waste works, sewer capacity being exceeded and increased land unpredictable weather events on movement. Climate change could also be a contributing factor for principal risks 1, 5, 6 and 7 our assets and infrastructure and/ detailed above. or are unable to successfully plan There are also some potential opportunities that climate change presents for us, including aquifer recharge and increased biological treatment. It is important that we understand these for future water resource supply opportunities to maximise the benefits. and demand due to climate change. What are we doing to manage the risk? Which part of Severn Trent Extreme Weather We have applied the learnings from the Freeze Thaw event in March 2018 and the prolonged hot, is affected? dry summer. See Principal Risk 6 above for further detail of our resilience improvements. Group-wide Our analysis for the National Flood Resilience Review (‘NFRR’), that was instigated by Defra and the Cabinet Office after the flooding of winter 2015/16, identified our sites that could be at Link to How We’re Achieving risk from river or surface water flooding using a new higher standard called the ‘Extreme Flood our Strategy Outline’. This has informed our contingency plans and future investment plans. Drive operational excellence and continuous innovation Climate Change Our climate change adaption report sets out our strategy for coping with future changes to Investing responsibly for sustained growth our climate. Link to our Values Our draft Water Resources Management Plan for the next 25 years was consulted on through We protect our environment 2018. The plan includes a detailed assessment of climate change impact for our region and our demand management and proposed new sources are designed to offset any supply risk resulting ODIs from climate change. The final plan will be published in summer 2019. 1-4, 5-18, 19-23, 42-43 We’re also taking a national perspective by working with other water companies to develop an interconnector that can move water quickly from the wetter north to the drier south, enhancing water resilience across the UK. Our own impact and contribution to climate change cannot be ignored and, as outlined in Principal Risk 7 above, there are a number of ways in which we are addressing our impact on the environment.

Movement in Net Risk Exposure

Key: Increase in net risk exposure No change in net risk exposure Decrease in net risk exposure

60 Severn Trent Plc Annual Report and Accounts 2019 > Strategic report Governance Group financial statements Company financial statements Other information

Financial risks

What is the risk? 9 What does it mean for us? Lower interest rates, higher We already provide significant funding but could be called upon to provide more money to reduce inflation or underperforming pension deficits in our Defined Benefit Schemes. equity markets may require What are we doing to manage the risk? us to provide more funding Our IAS19 deficit has reduced from £520m as at 31 March 2018 by £67m to £453m as at 31 March for our pension schemes. 2019. The main pension scheme benefits from significant levels of interest rate, inflation and equity hedging to reduce materially the impact on the scheme deficit from these risks. We are currently in discussion with the scheme Trustees to agree the triennial actuarial valuations as at Which part of Severn Trent 31 March 2019 and resultant deficit repair payments for the next three years. These negotiations may, in due course, also involve the Pension Regulator. Due to market conditions at 31 March is affected? 2016 (the date of the last triennial valuation) and 31 March 2019, these negotiations may result in Group-wide increased annual deficit repair payments.

Link to How We’re Achieving Movement in Net Risk Exposure our Strategy Investing responsibly for sustained growth

What is the risk? 10 What does it mean for us? We are unable to fund the business We must ensure sufficient liquidity is available to meet our near-term financial commitments. We have a significant funding requirement in AMP6, to fund our investment programme and sufficiently in order to meet our refinance maturing debt. This is a well-controlled risk, but it is important that we maintain these liabilities as they fall due. high standards to mitigate this risk.

What are we doing to manage the risk? Which part of Severn Trent We have a marked improvement against this risk exposure as our liquidity position has increased is affected? materially. Due to the current political and economic landscape we have increased our available Group-wide liquidity to a total of 29 months. We have been active in the Euro Medium Term Note (‘EMTN’) market, increased our committed bank facilities and have accessed the US Private Placement Link to How We’re Achieving market and GBP public bond market this year. This demonstrates we are able to replace the our Strategy European Investment Bank as a source of financing caused by the UK’s planned departure from the European Union. Investing responsibly for sustained growth See our Viability statement on pages 62 to 63.

Movement in Net Risk Exposure

Brexit Statement At the time of writing, the terms of the Resilience, Logistics, Communications, robust process for maintaining stock UK’s departure from the EU (‘Brexit’) Finance and Capital Delivery. We have levels. This has also been a key focus remain uncertain. Brexit does not been actively engaged with a Water for the OSG, which accordingly has give rise to a new principal risk for UK coordinated group called the worked with suppliers to increase stock the Group. However, it does have the Operations Strategy Group (‘OSG’) at levels of chemicals across the UK. potential to impact risks in other areas an executive level, focusing on industry The Government and other industry of our operations, such as supply chain, preparedness and industry-wide regulators have been kept informed interest rates, availability of funding, testing of response plans for a no-deal of preparations throughout. We have regulatory changes and uncertainty for scenario. We’re also working with a also increased stock for critical spare the domestic economy. number of Local Resilience Forums to parts, where a potential risk has test our approach and plans. We are been highlighted, by working with our Our preparations for a no-deal Brexit confident that we are well prepared supply chain. are well advanced and include a Brexit for the UK’s departure from the EU Steering Committee to oversee the Progress in the Brexit negotiations will and specifically the risks associated contingency and scenario planning continue to be monitored and the risks with no-deal. The most significant necessary to operate effectively if the and uncertainties will be managed risk identified is associated with the UK leaves the EU without transition through our existing ERM process. availability of chemicals imported into arrangements. The Committee the UK. We identified this at an early covers: Incident Management, stage and have ensured we have a People, Procurement, Security and

Severn Trent Plc Annual Report and Accounts 2019 61 Strategic report

Viability statement

• Severn Trent Water’s financial However, the changing nature of structure, which is close to the Ofwat regulation of the water industry Assessment notional capital structure and our plan increases the uncertainty that is inherent is to retain this; and in the Group’s financial projections. The Group has an established planning • Severn Trent Water’s progress in of current and forecasting process and the developing plans for AMP7, the Directors consider that the assessment successful execution of which would of the Group’s prospects is more reliable position and deliver benefits to all stakeholders and if it is based on an established process. financial incentives that would help to The Group’s latest medium-term plan improve our financial resilience in the extends in detail to the end of the next long-term period beyond 2025. AMP period in 2025 with less detailed The Group has significant investment projections looking beyond this. programmes that are largely funded prospects A longer period of assessment through access to debt markets. introduces greater uncertainty The Group’s strategic funding objectives because the variability of potential reflect the long-term nature of the Severn The Directors’ assessment of the outcomes increases as the period Trent Water business and the Group seeks Group’s current financial position is considered extends. to obtain a balance of secure long-term set out in the Chief Financial Officer’s funding at the best possible economic Bearing in mind the long-term nature review on pages 48 to 53. cost. The Group’s Treasury Policy requires of the Group’s business; the enduring The Group’s principal operating subsidiary that it maintains sufficient liquidity to demand for its services; the nature of the is Severn Trent Water, which is a regulated cover cash flow requirements for a rolling Group’s established planning process long-term business characterised by period of at least 18 months in order to and the changing nature of the regulation multi-year investment programmes and mitigate the risk of restricted access of the water industry in England and stable revenues. The water industry in to capital markets. The Group’s debt Wales, the Directors have determined England and Wales is currently subject to maturity profile is actively managed by that seven years is an appropriate economic regulation rather than market the Group Treasury department to spread period over which to assess the Group’s competition, and Ofwat, the economic the timing of refinancing requirements prospects and make its viability regulator, has a statutory obligation to and to enable such requirements to statement this year. secure that water companies can (in be met under most market conditions. particular through securing reasonable The weighted average maturity of debt at Assessment of viability returns on their capital) finance the the balance sheet date was 14 years. In assessing its future prospects, the proper carrying out of their statutory The Group has an established process Group has considered the potential functions. Ofwat meets this obligation to assess its prospects. The Board effect of risks and uncertainties that by setting price controls for five year undertakes a detailed assessment of the could have a significant financial impact Asset Management Periods (‘AMPs’). Group’s strategy on an annual basis and under severe but plausible scenarios. This mechanism reduces the potential for the output from this assessment sets the The risks and uncertainties considered variability in revenues from the regulated framework for the Group’s medium-term were identified in the Group’s ERM business. The current AMP runs until plan, which is updated annually. process, which is described on page 54, March 2020 and Ofwat has published and from the key assumptions in the its draft determination of price controls The Group’s medium-term plan financial model. The scenarios tested for Severn Trent Water for the AMP assesses its prospects and considers are described in the table to the right. period 2020-2025 (‘AMP7’). Severn Trent the potential impacts of the principal Water has made significant progress risks and uncertainties. Stress tests are The Group has significant funding in developing its plans to deliver the performed to assess the potential impact requirements to refinance existing debt operational and financial performance set of combinations of those risks and that falls due for repayment during the out in the draft determination. Ofwat will uncertainties. The plan also considers period under review and to fund the publish its Final Determination for AMP7 mitigating actions that the Group might Group’s capital programme. Under all in December 2019. We do not expect take to reduce the impact of such scenarios considered the Group would this to be materially different from the risks and uncertainties and the likely remain solvent and have access to draft determination. effectiveness of those mitigating actions. sufficient funds in normal market conditions. The Group’s Treasury Policy When considering the Group’s prospects Period of assessment requires that it retains sufficient liquidity beyond 2025, it is necessary to make to meet its forecast obligations, including The Directors considered a number of assumptions about the price review debt repayments for the next 18 months. process for the period 2025–2030 factors in determining the period to be (‘PR24’), which will take place in 2024, covered by the assessment. The long-term The Group’s business plans are based and has not yet been specified. In making nature of the Group’s principal business, on the current regulatory framework this assessment we have taken together with relatively stable revenues and do not take into account any changes account of: and a model of economic regulation that that might arise if a future Government places a duty on the regulator to secure implemented a policy of renationalisation • Ofwat’s statutory duty to secure that that water companies can finance the of the water sector. companies can finance the proper proper carrying out of their functions, carrying out of their functions; support a longer period of assessment.

62 Severn Trent Plc Annual Report and Accounts 2019 > Strategic report Governance Group financial statements Company financial statements Other information

Scenario tested Related principal risk Potential mitigating actions 1. An increase in the funding deficit of the Group’s defined benefit Risk 9: Increased funding Discuss impact on debt covenants with lenders pension schemes for pension schemes and seek a temporary waiver if necessary. The planned funding for the Group’s defined benefit pension Consider use of hybrid debt instruments to arrangements is based on current assumptions for future inflation, protect credit ratings. asset returns and members’ longevity. Outcomes different from Consider a temporary reduction in dividends. these might result in additional cash contributions being required Identify and implement sustainable cost during the period under consideration. Contributions are reviewed savings and efficiencies. and agreed with the Scheme trustee on a triennial basis with the Reduce working capital to support cash flow. next valuation of the main scheme based on the funding position as at 31 March 2019. 2. STW experiences a severe climate event, operational failure or Risk 4: Cyber security Reduce discretionary expenditure to cover other exceptional event with a very significant impact Risk 6: Failure of key assets any extra costs resulting from the event. The Group’s ERM process has identified a number of risks Risk 7: Health and safety Consider use of hybrid debt instruments to including extreme weather events, failure of key assets and and environmental impact protect credit ratings. cyber attacks that might have a significant impact on the Group’s Risk 8: Impact of extreme Consider a temporary reduction in dividends. operational and financial performance. weather/climate change 3. A reduction in inflation or increase in interest rates for part of N/A – key assumption in Reduce discretionary expenditure in the the period under consideration financial model short term. Severn Trent Water’s revenues are linked to inflation. Low or Reduce working capital to support cash flow. negative inflation tends to adversely impact profits and cash flows Consider a temporary reduction in dividends. in increases in costs exceed increases in revenue. Higher costs of debt would adversely impact the Group’s profits, cash flows and credit metrics. 4. STW underperforms against its performance commitments Risk 1: Failure to deliver Reduce discretionary expenditure to cover Severn Trent Water operates under a regulatory model which what our customers want any extra costs resulting from penalties. encourages companies to deliver what customers want using Discuss the impact on debt covenants with performance related rewards and penalties. Failure to deliver lenders and seek a temporary waiver if performance at the committed level can lead to significant penalties. necessary. 5. STW incurs higher costs than planned that are not funded Risk 2: Changes in the Reduce discretionary expenditure to cover Significant overspending could result in a deterioration in financial regulatory environment for any extra costs resulting from penalties. metrics and performance, which might adversely impact the the UK water industry In the medium-term implement a cost Group’s solvency. reduction programme to deliver sustainable cost savings and efficiencies to bring costs back in line with regulated allowances. Discuss impact on debt covenants with lenders and seek a temporary waiver if necessary. Consider a temporary reduction in dividends. 6. A combination of scenarios 2,3 and 4 See above The same mitigating actions would be The combined scenario represents a situation where several of the available to the Group as above, but their severe but plausible scenarios occur simultaneously. application would be deeper.

In making its assessment the Board has Governance and assurance the Company’s current position and made the following key assumptions: principal risks. The Board reviews and approves the • Any period in which the Group is medium-term plan on which this viability Based on that assessment, the Directors unable to access capital markets to statement is based. The Board also have a reasonable expectation that the raise finance during the period under considers the period over which the Company will be able to continue in review will be shorter than 18 months. assessment of prospects and viability operation and meet its liabilities as they fall due over the period to 31 March 2026. • There is no renationalisation of statement should be made. The Audit the water sector in the period Committee supports the Board in under consideration. performing this review. Details of the Audit Committee’s activity in relation to The Strategic report has been approved On this basis, the stress tests indicated the Viability Statement are set out in the by the Board. that none of these scenarios, including Audit Committee report on page 85. By order of the Board the combined scenario, would result in an impact to the Group’s expected This statement is subject to review by liquidity, solvency or debt covenants that Deloitte, our external auditor. Their audit could not be addressed by mitigating report is set out on page 129. actions and hence are not considered Bronagh Kennedy threats to the Group’s viability. Assessment of viability The Directors have assessed the viability Group General Counsel and of the Company over a seven year period Company Secretary to March 2026, taking into account 20 May 2019

Severn Trent Plc Annual Report and Accounts 2019 63 Governance

Governance

Dear Shareholder Chairman’s I am pleased to introduce our More information about our company or Governance report for 2019, on behalf the Company’s purpose and culture can of your Board and in accordance with be found on page 75. introduction the 2016 UK Corporate Governance As discussed on page 82, we are Code (the ‘Code’). This report outlines committed to diversity and inclusion to governance how we have ensured that best practice in all its forms, and during the year and effective corporate governance we were pleased to see the Company’s procedures are in place to help support progress continue to receive external the creation of long-term value for the recognition. Severn Trent was mutual benefit of all of our stakeholders. acknowledged as a role model by the As highlighted in my Chairman’s Women and Equalities Select Committee statement on page 16, this has been an on gender inclusion and recognised for exceptionally busy period for the Board, the female representation within our and specifically the Audit Committee, Executive Committee and direct reports with a significant amount of time being team, being placed in the top four spent finalising our PR19 business among FTSE100 companies by the 2018 plans. I would like to convey the Board’s Hampton-Alexander Review. thanks to John Coghlan for his continued dedication and support to the Board as Workforce engagement Chairman of the Audit Committee during Engaged people are the key to the Andrew Duff this time. success of Severn Trent, which is why Chairman The year saw continued evolution of our one of our five key strategic goals is corporate governance arrangements, to create an awesome place to work. Board Focus 2018/19 with time being spent refining our Your Board recognises the importance of 1 processes and procedures in readiness understanding the views of the workforce 5 for implementation of the new 2018 Code, and considers that our Employee Forum which will apply to us next year. is an excellent means of making sure that views from across the organisation To ensure the long-term success are considered in Board discussions and of your business, Directors and the decision making. Additional details on companies they lead need to build and our workforce engagement activities can maintain successful relationships with be found on page 108. a wide range of stakeholders, taking 4 account of and responding to their Engagement with our views. These relationships will only other stakeholders 2 be successful and enduring if they are based on respect, trust and mutual Severn Trent’s success also depends on your Board taking decisions that 3 benefit. Accordingly, we want to promote a culture of integrity and openness, deliver mutual benefit to our customers, 1. Finance & Risk 33% which values diversity and is responsive communities and shareholders. (Speciﬁc Finance items and CFO’s report) 2. Strategy 20% to the views of shareholders and While the Board meets with stakeholders (Items for discussion/approval) wider stakeholders. throughout the year, the AGM is a key 3. Governance 16% (Governance items, Company Secretary’s report, The Board has also embraced Ofwat’s event which gives us the opportunity to and Committee reports) principles for Board leadership, engage with you in person and answer 4. Performance Review 25% (Standing items – excluding CFO’s report) transparency and governance with its your questions on the performance of 5. Other 6% emphasis on the importance of strong your business. (Procedural Business) board leadership and the special TOTAL (Mins) 100% Further details on how we have engaged responsibilities attached to regulated with all of our stakeholders over the year monopoly companies providing an can be found on page 73. essential public service. Documents available at severntrent.com Board effectiveness Severn Trent Plc Articles of Association Company purpose and culture This year the Board undertook an internal Matters Reserved to the Board The Board recognises the importance evaluation. The results of this review Non-Executive Director Letters of its role in setting the tone for Severn can be found on page 77. I am pleased to of Appointment Trent’s culture and making sure that report that your Board, its Committees Terms of Reference for Board Committees it is embedded throughout the Group. and individual Directors continue to Board Diversity Policy Statement Our Code of Conduct, ‘Doing the Right operate effectively. Tax Strategy and Tax Report Thing’, sets out clearly defined values Group Conflicts of Interest Policy and standards of behaviour that we Non-Audit Services Policy expect from everyone who works for, and with, Severn Trent.

64 Severn Trent Plc Annual Report and Accounts 2019 Strategic report > Governance Group financial statements Company financial statements Other information

Looking ahead UK Corporate Governance Code Compliance Statement Maintaining the highest standards of corporate governance across the Compliance with the 2016 UK Corporate Governance Code (the ‘Code’) Group is integral to the delivery of our In respect of the year ended 31 March 2019, Severn Trent Plc was subject to the strategy, and we remain focused on 2016 Code (available from www.frc.org.uk). The Board is pleased to confirm that creating sustainable long-term value Severn Trent Plc applied the principles and complied with all of the provisions of for the mutual benefit of our customers, the 2016 Code throughout the year. communities and shareholders. Further information on compliance with the 2016 Code can be found as follows: In July 2018 the FRC published the 2018 Code, which will apply to our financial Leadership 66–71 year ending 31 March 2020. As you will The role of the Board see within this report, the Board has Division of responsibilities carefully considered the 2018 Code and The Chairman implemented many of the new principles Non-Executive Directors earlier than required. This will allow Effectiveness 66–84 new processes and procedures to fully Composition of the Board embed ahead of our 2020 Annual Report and Accounts. Commitment Development Board succession Information and support The Board and the Nominations Evaluation Committee have fully considered Board Re-election succession during the course of the year Accountability 85–92 to ensure that the Board has the right Financial and business reporting mix of skills and experience, as well as Risk management and internal control the capability to provide constructive Audit Committee and auditors challenge and promote diversity. Remuneration 97–122 Additional detail can be found within the Nominations Committee report on The level and components of remuneration page 84. Procedure Relations with shareholders 73–74 As mentioned in my Chairman’s statement on page 16, I believe this is the Dialogue with shareholders right moment to step down and allow a Constructive use of general meetings new Chair to lead the Board into the next phase for Severn Trent. The Nominations Disclosure Guidance and Transparency Rules Committee, led by Senior Independent We comply with the corporate governance statement requirements pursuant to the Director Kevin Beeston, is overseeing FCA’s Disclosure Guidance and Transparency Rules by virtue of the information the process ahead of making a formal included in this Governance section of the Annual Report together with information recommendation to the Board. contained in the Information for shareholders section on page 199. The Nominations Committee is in the initial stages of succession planning and Governance of subsidiaries further detail can be found on page 84. Kevin Beeston chaired the Committee The membership of the Board of the listed Company, Severn Trent Plc, is the when it met to discuss this matter. same as that of Severn Trent Water Limited. This structure was implemented in 2007 to make sure that the highest standards of corporate governance are I hope you find this report useful and I applied at the regulated subsidiary level and to foster greater visibility and would like to encourage our shareholders supervision by the Severn Trent Plc Board. to attend our AGM. We welcome the opportunity to meet with you and I hope Severn Trent Water Limited complies with the Code, and Hafren Dyfrdwy you will give us the pleasure of doing so Cyfyngedig complies with the Code where it is practical to do so. this year. Severn Trent Water Limited and Hafren Dyfrdwy Cyfyngedig comply with Ofwat’s principles of leadership, transparency and governance to ensure the highest standards of governance. A more detailed explanation of the Governance Framework and company structures which apply to each of our regulated subsidiaries can be found Andrew Duff in their Annual Reports, available on their respective websites. Chairman Abbreviated terms used throughout this governance report 20 May 2019 Hafren Dyfrdwy Hafren Dyfrdwy Cyfyngedig Severn Trent Water Severn Trent Water Limited

Severn Trent Plc Annual Report and Accounts 2019 65 Governance

Board of Directors Leadership & Effectiveness

1. 2. 3. 4.

5. 6. 7. 8.

1. Andrew Duff BSc, FEI 2. Olivia Garfield BA (Hons) 3. James Bowling BA (Hons) Appointed: Non-Executive Director on 10 May Appointed: Chief Executive on 11 April 2014 Econ, ACA 2010, Chairman on 20 July 2010 Membership: C E D Appointed: Chief Financial Officer on Membership: N C R Olivia (Liv) brings to the Board a wealth of 1 April 2015 Andrew’s extensive experience of international experience managing customer service Membership: D T E and regulated business, strategic management delivery and complex infrastructure and James is a chartered accountant, who and customer service in high profile, dynamic organisations in a regulated environment. started his career with Touche Ross and environments has equipped him well for the Before joining Severn Trent, Liv was Chief brings significant financial management, role of Chairman of the Severn Trent Group. Executive Officer of Openreach, part of the BT M&A and business transformation expertise Andrew spent 16 years at BP Plc in marketing, Group, where she spearheaded and oversaw to the Board. Prior to joining Severn Trent, strategy and oil trading. He joined National the commercial roll-out of fibre broadband to James was interim Chief Financial Officer Power in 1998 and the Board of Innogy Plc upon two-thirds of the country. She joined BT in 2002 of Shire Plc, where he had been since 2005, its demerger from National Power in 2000. and held the pivotal roles of Group Director of first as Head of Group Reporting and from He played a leading role in its restructuring Strategy and Regulation, Managing Director 2008 as Group Financial Controller. Prior to and transformation through the opening of Commercial and Brands, Global Services and joining Shire, James spent nine years at Ford competition in energy markets culminating in UK Customer Services Director. From 1998 Motor Company in various finance roles of its subsequent sale to RWE in 2003. He became to 2002, Liv worked for Accenture as a increasing responsibility. Chief Executive Officer of the successor consultant in the Communications and High Company and a member of the RWE Group Tech Market Unit, designing and implementing Executive Committee until his retirement in business change solutions across a number of 4. John Coghlan BCom, ACA 2010. He was a Non-Executive Director of industry sectors. Appointed: Independent Non-Executive Wolseley Plc from July 2004 until November Director on 23 May 2014 Other roles 2013. Andrew was appointed Non-Executive • Member of The 30% Club Membership: A T N Deputy Chairman of Elementis Plc on 1 April 2014 and became Non-Executive Chairman of • Director of Water UK John has a wealth of experience in financial Elementis Plc on 24 April 2014. He is the Senior • Member of Take Over Panel – and general management. He spent 11 years Trustee of Macmillan Cancer Support. Hearings Committee at Exel PLC as Chief Financial Officer and • Director of Water Plus Limited – joint ultimately as Deputy Chief Executive Officer Other roles venture with United Utilities until retiring in 2006. Since then, he has been • Member of the CBI President’s Committee a Director of publicly-quoted and private • Fellow of the Energy Institute companies across several sectors. Currently, • Senior Trustee of Macmillan John is also Non-Executive Director and Audit Cancer Support Committee Chairman of Associated British Ports Holdings Limited and Clarion Housing Group, and is Non-Executive Director of O.C.S. Group Limited. John has recent and relevant financial experience as a member of the Institute of Chartered Accountants in England and Wales. Other roles • Chairman of Freight Transport Association Ireland Limited • Chairman of Hafren Dyfrdwy Cyfyngedig, Committee membership as at 31 March 2019 the Group’s licensed entity in Wales A Audit Committee C Corporate Responsibility Committee N Nominations Committee E Executive Committee R Remuneration Committee D Disclosure Committee T Treasury Committee denotes Committee Chair

66 Severn Trent Plc Annual Report and Accounts 2019 Strategic report > Governance Group financial statements Company financial statements Other information

5. Dame Angela Strank DBE, 6. The Hon. Philip Remnant CBE with Procter & Gamble AG before moving to Kraft Jacobs Suchard AG as Director FRS, FREng, CEng, FIChemE, FCA MA of Marketing and Strategy where she was DSc, PhD Appointed: Independent Non-Executive also a member of the Executive Committee. Appointed: Independent Non-Executive Director on 31 March 2014 Dominique previously held a number of Director on 24 January 2014 Membership: R A T N senior roles at Coca-Cola Enterprises and at Coca-Cola Company, including President Membership: C N R Philip is a senior investment banker and brings – Western Europe, President – Europe and Angela brings a wealth of strategic, technical substantial advisory and regulatory experience Chairman – Europe. Dominique was a Non- and commercial experience to the Board. to the Board. A chartered accountant, he is Executive Director of Peugeot-Citroen SA until Angela is Head of Downstream Technology Senior Independent Director of Prudential Plc, December 2015 and was a Non-Executive and Group Chief Scientist at BP Plc. Deputy Chairman of the Takeover Panel and Director of AXA SA until April 2017. She is a member of the Downstream Executive Chairman of City of London Investment Trust Leadership Team. Angela is responsible Plc. Previously, Philip was Vice Chairman of for enabling delivery of the Downstream Credit Suisse First Boston Europe and Head 8. Kevin Beeston FCMA of the UK Investment Banking Department. strategic agenda through the development of Appointed: Independent Non-Executive Philip was Director General of the Takeover differentiated technology advantage across the Director on 1 June 2016, Senior Independent Panel for two years between 2001 and 2003, refining, fuels, lubricants and petrochemicals Non-Executive Director on 20 July 2016 businesses. Since joining BP in 1982, she has and again in 2010. He served on the Board held many senior leadership roles around the of Northern Rock Plc from 2008 to 2010 Membership: A R N world in business development, commercial and from 2007 to 2012 was Chairman of the Kevin has a wealth of commercial, financial and technology, including in 2012, as Vice Shareholder Executive. and high level management experience. President and Head of the Chief Executive’s Philip has recent and relevant financial Kevin is Chairman of Taylor Wimpey Plc and Office. In 2010, Angela was the winner of experience as a fellow of the Institute of Elysium Healthcare and also a Non–Executive the UK First Woman’s Award in Science Chartered Accountants in England and Wales. Director of the Football Association Premier and Technology recognising pioneering UK League Limited and Marston Corporate women in business and industry. Her track Other roles Limited. Previously, Kevin spent 25 years at record and experience in strategy, operations, • Director and Trustee of St Paul’s Serco Plc, where he held the roles of Finance technology and transformational change are Cathedral Foundation Director, Chief Executive and finally Chairman a complementary addition to the Board’s skill until 2010. Kevin was previously Chairman of set. In June 2017, Angela was recognised in the 7. Dominique Reiniche MBA Domestic & General Limited, Partnerships in Queen’s Birthday Honours List with the title Appointed: Independent Non-Executive Care Limited and Equiniti Group Plc, and was Dame Commander of the Most Excellent Order Director on 20 July 2016 a Non-Executive Director of IMI Plc. of the British Empire (‘DBE’) for services to the Kevin has recent and relevant financial Oil and Gas Industry and encouraging women Membership: C N experience as a fellow of the Chartered into STEM careers. Dominique has a wealth of operational experience in Europe and has international Institute of Management Accountants and Other roles consumer marketing and innovation was previously Finance Director at Serco Plc. • Board Governor, The University experience. Dominique is Independent Chair of Manchester of CHR Hansen Holdings A/S and also a Non- • Member of the Royal Society’s Science, Executive Director of Mondi Plc and PayPal Industry & Translation Committee (Europe). Dominique started her career

Board and Committee meeting attendance 2018/19 The following table shows the attendance of Directors at scheduled Board and Committee meetings during the year: Audit Nominations Remuneration Treasury CR Director Position Board Committee Committee Committee Committee Committee Attended/scheduled Andrew Duff Chairman 7/7 – 4/4 4/4 – 4/4 Kevin Beeston Senior Independent Director 7/7 4/4 4/4 4/4 – – James Bowling Chief Financial Officer 7/7 – – – 5/5 – John Coghlan Non-Executive Director 7/7 4/4 4/4 – 5/5 – Liv Garfield Chief Executive 7/7 – – – – 4/4 Dominique Non-Executive Director 7/7 – 4/4 – – 4/4 Reiniche Philip Remnant Non-Executive Director 7/7 4/4 4/4 4/4 5/5 – Dame Angela Non-Executive Director 7/7 – 4/4 4/4 – 4/4 Strank

All meetings are structured to allow open discussion. At each Board meeting the Directors are made aware of the key discussions and decisions of the five Board Committees by the respective Committee Chairmen. Minutes of Board and Committee meetings are circulated to all Directors after each meeting. Details of the Board’s activities during the year are set out on page 72. In the event a Director is unable to attend a meeting, they still receive related papers in advance of the scheduled meeting and any input they have provided is fully considered.

Severn Trent Plc Annual Report and Accounts 2019 67 Governance

Executive Committee Leadership & Effectiveness

1. 2. 3.

4. 5. 6.

1. Olivia Garfield BA (Hons) 4. Sarah Bentley BSc (Hons), 5. Martin Kane BSc, CEng, CEnv, Appointed: Chief Executive on 11 April 2014 Management Science with MICE, MIWEM, FIW Please see full biography on page 66. Computing Special Advisor Chief Customer Officer Membership: E 2. James Bowling BA (Hons) Membership: E Martin has held various senior roles giving Econ, ACA Sarah is responsible for Customer Retail him an extensive and unique understanding Appointed: Chief Financial Officer on and Network operations, Group Technology of the design, construction and operation of 1 April 2015 and Transformation. Previously Sarah water and waste water treatment plants, water distribution networks and sewerage systems. Please see full biography on page 66. worked for Accenture as Managing Director of their digital business in UK and Ireland, Martin was Director of Customer Relations, focused on digital marketing, mobility and Severn Trent Plc, from May 2006 until January 3. Dr. Tony Ballance BSc (Hons), analytics for customers, employees and 2012, and Chief Executive Officer of Severn MA (Econ), PhD the enterprise. Prior to Accenture, Sarah Trent Services until July 2014. Director of Strategy and Regulation was CEO of Datapoint, an Alchemy backed Other roles company delivering CRM services, and Senior Membership: E D • Chairman of the Board of Trustee’s Vice President of eLoyalty, a global CRM of International Society for Tony’s extensive experience in utility policy, and marketing consultancy. She was SVP of Trenchless Technology regulation and stakeholder engagement leaves the European Business, led the sales and • Chairman of Panton McLeod Limited him ideally placed to lead the Company’s operations activity in North America and ran strategic, regulatory and external affairs eLoyalty Ventures L.L.C. working in Silicon • Chairman of the Coventry and work. Prior to joining Severn Trent, he held the Valley, Austin and New York. Warwickshire Growth Hub posts of Chief Economist for Ofwat, Director of London Economics and Director of Stone and Other roles 6. Bronagh Kennedy BA (Hons) • Non-Executive Director of Lloyds Bank Plc Webster Consultants. Group General Counsel and and Bank of Scotland Plc Company Secretary Other roles • Director and Secretary of • Member of Water UK Council Twizzletwig Limited Membership: E D • Senior Independent Director of the National Bronagh joined Severn Trent in 2011 as Group Forest Company Company Secretary and General Counsel. • Chairman of the Corporate Advisory Panel She is also responsible for compliance and of the Regulatory Policy Institute assurance and the Group’s Corporate Social Responsibility programme. During her career she has worked across several sectors including finance, leisure and hospitality and she has a broad range of corporate experience, having led FTSE100 company HR, communications, insurance, risk and health, safety and wellbeing functions. She has also been a Non-Executive Director on industry bodies such as the British Hospitality Association. Prior to moving in-house she was a senior associate solicitor in Allen & Overy’s Committee membership as at 31 March 2019 banking and insolvency group. A Audit Committee C Corporate Responsibility Committee Other roles N Nominations Committee E Executive Committee • Chairman, HR and Remuneration Committee and Non-Executive Director R Remuneration Committee D Disclosure Committee of British Canoeing T Treasury Committee denotes Committee Chair • Member of the GC100 Group

68 Severn Trent Plc Annual Report and Accounts 2019 Strategic report > Governance Group financial statements Company financial statements Other information

7. 8. 9.

10. 11.

7. Helen Miles CIMA 8. Andy Smith BTech (Hons) 10. Dr. James Jesic BEng (Hons), Capital Delivery and Commercial Director Managing Director, Business Services PhD, MIChemE, CEng Membership: E Membership: E Managing Director of Production Helen joined Severn Trent in November 2014 Andy was appointed to the role of MD, Membership: E as the Chief Commercial Officer. Helen brings Business Services on its creation in 2014 James is a chartered chemical engineer with her a breadth of commercial experience having previously been responsible for the who joined Severn Trent on its graduate having worked within regulated businesses drinking water business within Severn Trent programme in 2003 and was appointed as and sectors across Telecoms, Leisure and Water. Andy brings to the role a broad range Managing Director of Production in 2017. Banking. As a member of the UK Board, Helen of executive and operational expertise gained During his time with the business, James has was instrumental in delivering HomeServe’s from diverse sectors. Currently, Andy is also had full accountability for the management future growth strategy and ensuring a a Non-Executive Director of Diploma Plc. of the operational multi-billion pound asset sustainable, customer-focused business. He has worked in the UK and overseas with base, being responsible for producing and Helen is Non-Executive Director of the Royal global businesses such as BP, Mars and supplying drinking water and collecting and Navy and an experienced finance professional. Pepsi in both engineering, HR and operational treating waste water for millions of customers Helen was previously Chief Financial Officer management roles. Previously, he has served across the Midlands. As part of that role, he for Openreach, part of BT Group Plc, and as a member of the Board at Severn Trent Plc has delivered industry-leading customer has extensive experience of delivering major and at Boots Group Plc. service performance, as well as driving sector- business transformation across the Group. Other roles leading environmental results. He has a PhD Prior to BT Group, Helen worked in a variety • Non-Executive Director, Chairman of the in Chemical Engineering from the University of sectors and organisations such as Bass Remuneration Committee and member of of Birmingham and attended Harvard Taverns, Barclays Bank, Compass Group the Audit and Nominations Committees of Business School. and HSBC. Diploma Plc Other roles • Director of Water Plus Limited – joint 11. Dr. Bob Stear MEng (Hons), • Non-Executive Director of the Royal Navy venture with United Utilities PhD, MCIWEM, CWEM, FIWater Chief Engineer 9. Neil Morrison BSc (Hons), FCIPD Membership: E Bob was appointed Chief Engineer in Director of Human Resources November 2018 and is a chartered Membership: E Environmental Engineer who joined Severn Neil joined Severn Trent in August 2017 as Trent in 1997 as a process technician. He has Director of Human Resources. Neil started a worked his way up through the Company career in HR management in 1996 and for the via operational, engineering, strategic and subsequent 12 years he worked in a variety of innovation roles. In particular Bob played a HR roles within FTSE100 companies, including key role in the transformation of the waste Rentokil Initial and GUS (which latterly became water business and successfully governed Home Retail Group). Before joining Severn a £1.2bn capital programme. In 2013, Bob Trent, Neil worked at Penguin Random House worked alongside the Government on the taking responsibility for strategic people implementation of the 2014 Water Act. issues across their publishing and distribution He has a PhD in waste water treatment. offices in the UK, APAC, India and South Africa. He was one of the main leads in helping to steer and finalise the global merger between Random House and Penguin.

Severn Trent Plc Annual Report and Accounts 2019 69 Governance

Governance Board composition and roles

As at 31 March 2019, our Board subject to annual re-election by Diversity Policy. The Board Diversity comprised the Chairman, five shareholders following the annual Policy Statement is available on the Non-Executive Directors and two Board effectiveness evaluation process. Severn Trent Plc website. Executive Directors. This term can be renewed by mutual Any new appointments to the Board agreement, up to a maximum total The details of their career background, result from a formal, rigorous and tenure of nine years. The current Letters relevant skills, Committee membership, transparent procedure, responsibility for of Appointment are available on the tenure and external appointments can be which is delegated to the Nominations Severn Trent Plc website. found within their individual biographies Committee (although decisions on on pages 66 to 67. Further detail on the The composition and effectiveness of Appointments are a matter reserved to role of the Chair and members of the the Board is subject to regular review the Board). Further information on the Board can be found below. by the Nominations Committee which, work of the Nominations Committee can in particular, considers the balance of be found on pages 81 to 84. The Chairman, Senior Independent skills, experience and independence of Director and Non-Executive Directors the Board, in accordance with the Board are appointed for a three-year term,

Director Responsibility Chairman • Leads our unified Board and is responsible for its effectiveness. Andrew Duff • Sets agendas and ensures timely dissemination of information to the Board, to support sound decision making and allow for constructive discussion, challenge and debate, in consultation with CEO, CFO and Company Secretary. • Responsible for scrutinising the performance of the Executive Committee and overseeing the annual Board effectiveness evaluation process. • Facilitates contribution from all Directors and ensures that effective relationships exist between them. • Ensures that the views of all stakeholders are understood and considered appropriately in Board discussion and decision-making. CEO • Represents Severn Trent externally to all stakeholders, including our employees, the Government and Liv Garfield regulators, customers, suppliers and the communities we serve. • Develops and implements the Group’s strategy, as approved by the Board. • Sets the cultural tone of the organisation. • Facilitates an effective link between the business and the Board to support effective communication. • Responsible for overall delivery of commercial objectives of the Group. • Promotes and conducts Group affairs with the highest standards of integrity, probity and corporate governance, in line with our strategic framework and values. The CEO’s review can be found on page 21. CFO • Manages the Group’s financial affairs. The CFO’s review can be found on page 48. James Bowling • Supports the CEO in the implementation and achievement of the Group’s strategic objectives. • Oversees Severn Trent’s relationships with the investment community. • Represents Severn Trent externally to all stakeholders, including our employees, the Government and regulators, customers, Pension Trustees for the Company’s defined benefit pension schemes, suppliers and the communities we serve. SID In addition to his responsibilities as a Non-Executive Director, Kevin also: Kevin Beeston • Supports the Chairman in the delivery of his objectives. • Acts as an alternative contact for shareholders should they have a concern that is unresolved by the Chairman, CEO or CFO. • Leads the appraisal of the Chairman’s performance with the Non-Executive Directors. • Undertakes a key role in succession planning for the Board, together with the Board Committees, Chairman and Non-Executive Directors. NEDs • Monitor the delivery of strategy by the Executive Committee within the risk and control framework set by John Coghlan the Board. • Satisfy themselves that internal controls are robust and that the external Audit is undertaken properly. Dominique Reiniche • Engage with internal and external stakeholders and feedback insights to the Board, including in relation to Dame Angela Strank employees and the culture of the Company. • Constructively challenge and assist in the development of strategy. Philip Remnant • Have a key role in succession planning for the Board, together with the Board Committees, Chairman and SID. • Serve on various Committees of the Board. Company Secretary • Ensures sound information flows to the Board in order for the Board to function effectively and efficiently. Bronagh Kennedy • Advises and keeps the Board updated on Listing and Transparency Rule requirements and on best-practice corporate governance developments. • Facilitates a comprehensive induction for newly appointed Directors, tailored to their individual requirements. • Ensures compliance with Board procedures and provides support to the Chairman. • Co-ordinates the performance evaluation of the Board in conjunction with the Chairman. • Provides advice and services to the Board.

70 Severn Trent Plc Annual Report and Accounts 2019 Strategic report > Governance Group financial statements Company financial statements Board Leadership Other information

Governance Framework

Board of Directors Chief Executive Severn Trent Plc

Executive Committee (‘STEC’)

Informing Reporting

Disclosure Committee – Executive Sub Committee

Board Committees

Corporate Treasury Nominations Remuneration Audit Responsibility Committee Committee Committee Committee Committee

Read more Read more Read more Read more Read more Page 94 Page 93 Page 81 Page 97 Page 85

Our Board Responsibility to all of our stakeholders Governance Framework for the approval and delivery of the The Board’s role is to ensure the Group’s strategy and for creating and The Board is supported by the Severn long-term success of Severn Trent. overseeing the framework to support Trent Governance Framework, which Maintaining the highest standards of its delivery sits with the Board. is set out above. The Governance governance is integral to the effective The requirements of the Board are Framework comprises the Board, delivery of our strategy and ensuring clearly documented in the Severn Trent STEC and their respective Committees. that the Board takes decisions that Plc Articles of Association, Schedule In line with the Code, the Board delegates create sustainable long-term value for of Matters Reserved to the Board and certain roles and responsibilities to its the mutual benefit of our shareholders, Charter of Expectations. These are various Committees. The Committees customers, employees and the available on the Severn Trent website. assist the Board by fulfilling their roles communities we serve. As outlined on page 70, there is a clear and responsibilities, focusing on their The operation of our Board is supported division of responsibilities between the specific activities, reporting to the Board by the collective experience of the roles of Chairman and CEO. To allow on decisions and actions taken, and Directors and the diverse skills and these responsibilities to be discharged making any necessary recommendations experience they possess. This enables effectively, the Chairman and CEO to the Board in line with their Terms the Board to reach decisions in a maintain regular dialogue outside the of Reference. The Board regularly focused and balanced way, supported by Boardroom, to ensure an effective flow reviews the Terms of Reference of each independent thought and constructive of information. Committee, which are available on the debate between the Directors. Trust and Severn Trent website. The Governance mutual respect are the cornerstones The Non-Executive Directors have Framework is also subject to periodic of relationships between our Directors, direct access to senior management review to ensure that it continues to with a Board dynamic that supports at all times. Informal as well as formal remain fit for purpose. open and honest conversations to ensure contact with the wider business is decisions are taken for the benefit of encouraged to develop a deeper Severn Trent Executive Committee understanding of Severn Trent’s the Company in full consideration of the Responsibility for the development and operations and requests for further impact on all stakeholders. implementation of the Group’s strategy information are welcomed. This broadens and overall commercial objectives rests the Non-Executive Directors’ sources with the Chief Executive who is supported of information and enables them to by STEC. More information on our STEC consider the wider impact of any Board members can be found on pages 68 to 69. decisions on stakeholders more broadly.

Severn Trent Plc Annual Report and Accounts 2019 71 Governance

Governance Leadership & Effectiveness

Main topics discussed by the Board during the year

Regular Updates Financing Strategy Governance and Regulatory • Reports from • Budget Stakeholders • PR19 Committee Chairs • Dividend approval • Board Effectiveness • Annual Report and • CEO Review evaluation Accounts/Annual • Draft results Performance Report • CFO Review and associated • Preparations for the presentations 2018 UK Corporate • Water Resources • Operational to analysts Governance Code Management Plan performance reviews – separate reports for • Pension Schemes • AGM documentation • Scheme of Charges the Regulated Business updates approval and and New Connections and Business Services discussion of AGM Charging • Annual Report and voting results • Reports from the Accounts for Severn • Renationalisation Employee Forum Trent Plc and Severn • Investor relations • GDPR Trent Water Limited strategy and updates • Corporate governance • Market Abuse developments and legal • Annual Performance • Presentations from Regulations affairs reports Report for Severn Trent Ofwat, DWI, CCW, Chair Water Limited of Customer Forum • Modern Slavery Act • Commercial and Capital Delivery reports • Group financing

Strategy Culture and Values Risk Management Environment • People Strategy • Company purpose and • Cyber risk • Environmental culture leadership • Talent development and • Whistleblowing updates succession planning • Training Academy • Supply Chain ESG • Regulatory updates development engagement strategy • Innovation update • Enterprise Risk • Annual employee • Climate change • Tax Strategy Management Reports survey results – QUEST • Environmental and • Board Strategy day – • Review of the Group • Employee recruitment water quality updates further detail can be Authorisation and retention found on page 75. Arrangements • Review of environmental • Review and approval of deep dives including • Health, Safety and • Brexit various Group policies Biodiversity, Energy Wellbeing to support Severn • Defence update Management and • Board diversity Trent’s culture of Doing Carbon • Review of Effectiveness the Right Thing of Risk Managements and Internal Controls

72 Severn Trent Plc Annual Report and Accounts 2019 Strategic report > Governance Group financial statements Company financial statements Stakeholder and Shareholder engagement Other information

We are proud to be the only utility working as a pathfinder company with the Purposeful Company Task Force. As part of our pathfinding role, the Board is committed to engaging effectively and working constructively with all of our stakeholders. The Board recognises the importance of considering all stakeholders in its decision-making, as set out in section 172 of the Companies Act, and the positive impact this has in promoting the success of the Company as a whole. The table below sets out details of key stakeholder engagement undertaken by the Board during the year.

Board Engagement and Activities Shareholders/ • Board approval of the half year and full year results. Board attended results presentations. Investors • Board approval of the Annual Report and Accounts. • Full Board attendance at the 2018 AGM. • Investor meetings: Executive and Non-Executive Directors undertook investor engagements in the year. • Investor feedback presented to the Board, through monthly reports and regular broker notes. • Investor roadshows to Australia, US, Canada and Europe. • Investor Relations strategy agreed by the Board. • Chairman attended the Capital Markets Day. Read more on page 74.

Customers • Customer-shareholders had the opportunity to meet the Board at our AGM and ask questions. • Customer Delivery Performance Report tabled at every Board meeting. • Extensive customer research considered regularly by the Board in relation to the PR19 plan and submission. • Board attended some of our PR19 customer research sessions.

Communities • Employees who live and work in our communities meet the Board at the Employee Forum, AGM and site/ operational visits. • Corporate Responsibility reports regularly discussed at Board meetings, including an update on community activities. • Board received updates on the Group’s volunteering programme during the year. • Board consideration of the community dividend, developed to fund projects in our community. • Immersive Board session on the ‘Wonderful Water Tour’ – our new innovative educational tour to inspire and educate children in our communities. • Volunteering update considered by the Board. • Board site visit to Lake Vyrnwy Reservoir and Visitor Experience Site.

Employees • Employee-shareholders had the opportunity to meet the Board at our AGM and ask questions. • CEO Employee roadshows and senior leader events. • Board attended a Company Purpose and Culture session with employee representation and discussion of the QUEST survey results. • Board meetings held at a variety of sites, including operational sites. Directors met a number of employees at these events. • Board site visits outside of the Board meeting calendar, where Directors met employees and discussed matters with them. • Chairman, Non-Executive Director and Executive Director attendance at the Employee Forum, including an opportunity to meet employees across the Group. Individual Directors provide feedback to the Board following Forum attendance. • Internal blogs by Executive Directors. • Regular senior leader engagement with Executive Directors. • Talent development considered by the Board. • Dedicated People Strategy discussion at Board Strategy day.

Regulators/ • Renationalisation reports considered by the Board. Government • Regulatory matters regularly considered at Board meetings, including PR19, Water Resources Management Plan and Scheme of Wholesale Charges. • Regulatory stakeholder attendance at Board meetings during the year. • Chairman met with Jonson Cox, Ofwat. • Engagement with DWI lead inspector, EA, CCW and the Pension Trustees for the Company’s defined benefit pension schemes. • Regulatory consultation updates provided to the Board, including Severn Trent’s proposed response.

Suppliers/ • Commercial Performance Report tabled at every Board meeting, including an update on relationships with suppliers Contractors and associated performance. • Chairman and Executive Director attendance at the Employee Forum, including attendance by suppliers.

Severn Trent Plc Annual Report and Accounts 2019 73 Governance

Stakeholder and Shareholder engagement continued

Institutional shareholders The Chief Executive and Chief Financial Investors have also been keen to and analysts Officer regularly meet shareholders understand how the business is during the year, often with other preparing for AMP7, and what factors The Board recognises the importance members of the Executive Committee. will drive long-term growth for our of representing and promoting the The Chairman and Senior Independent regulated business. In our non-regulated interests of its shareholders and other Director also offer to meet with our business, investors have focused on the stakeholders. Various mechanisms have largest shareholders without the acquisition of Agrivert in November 2018, been put in place to ensure the Board Executive Directors once every year and and the impact of this on our energy self- remains in touch, with key activities set are available to meet with investors at generation targets. out below: any other time upon request. At a macroeconomic level, Brexit and • monthly update reports on the key In line with the UK Corporate Governance renationalisation have been key matters shareholder engagement activities Code, we recognise that the Board has of focus. On Brexit, emphasis has been undertaken by the Executive overall responsibility for ensuring that a on the Company’s preparedness for a Committee and the Investor satisfactory dialogue with shareholders range of outcomes. More can be found Relations Team; takes place. The Chairman, Chief on page 61. On renationalisation the • monthly report of our shareholder Executive and the Chief Financial Officer focus has centred on how the debate register, outlining the significant report shareholder views on Severn has evolved over the last 12 months, buyers and sellers of Severn Trent Plc Trent Plc to the Board at every meeting. and whether the sentiment amongst politicians and the general public shares; and An Investor Relations strategy was has changed. • regular summaries of sector agreed by the Board during the research notes, allowing the Board year. This sets out our approach to Looking ahead to 2019/20 to understand the key opinions being identification of, and engagement with, communicated to investors by sell- the Company’s shareholders, sell-side We have an established structured side analysts. analysts and debt investors. programme for investor engagement, incorporating roadshows to many of the Investor engagement 2018/19 engagement key locations where our shareholders are located, including the UK, North This has been a pivotal year for investor The Board has an active Shareholder America and Australia. We have also engagement, with the submission Engagement strategy, the main elements confirmed attendance at a number of of the Company’s business plans in of which are set out below. industry conferences. September 2018, and Ofwat’s Initial Presentations are made to shareholders Assessment of the Plans in January We expect AMP7 readiness, and our and city analysts following the release 2019. These two events have been the ability to perform against the three of the half year and full year results. focus of investor interaction during the regulatory levers, to be the key themes In this key year of our regulatory cycle, year. Investors have largely focused on for investors throughout 2019/20. We also additional presentations were made our ability to perform against the three anticipate investors to be focused on the following the submission of our business levers of regulatory outperformance – Group’s dividend policy for 2020 onwards, plans for 2020-25, and Ofwat’s initial ODIs, Totex and financing – with enquiries which will be announced following the assessment of our plans. This year centred on our AMP6 performance publication of the Final Determination we held a Capital Markets Day, which against these levers, and how this might for both Severn Trent Water and Hafren focused on the key areas of the Severn translate into our AMP7 performance. Dyfrdwy in December 2019. Dialogue with Trent Water plan. our shareholders on macroeconomic risks is continually maintained.

Primary investor events May 2018 London Roadshow September 2018 Bernstein Strategic June 2018 Europe Roadshow Decisions Conference June 2018 US Roadshow September 2018 Capital Markets Day June 2018 RBS Reverse October 2018 Scott Harris Roadshow Roadshow November 2018 London Roadshow June 2018 Scott Harris Roadshow November 2018 Edinburgh Roadshow July 2018 Australia Roadshow November 2018 Switzerland Roadshow July 2018 Scott Harris Roadshow January 2019 Citi European Utilities August 2018 Citi UK Utilities and Infrastructure Reverse Roadshow Conference 2019 August 2018 Credit Suisse Reverse February 2019 London Roadshow Roadshow February 2019 US/Canada Roadshow September 2018 Morgan Stanley February 2019 Australia Roadshow Conference March 2019 Scott Harris Roadshow Investors attended our Capital Markets Day in September 2018.

74 Severn Trent Plc Annual Report and Accounts 2019 Strategic report > Governance Group financial statements Company financial statements Leadership and Effectiveness Other information The Board in action

The Board in action The Board will also consider the Group’s These policies codify how to identify carbon and energy strategies and sector and deal with suspected wrongdoing, The Board sets the strategy, oversees legitimacy, with discussion on key fraud or malpractice; how to ensure its delivery and maintains the highest priority areas. that the highest standards of safety are standards of governance which are maintained; and how to apply good ethics integral to its delivery. The Board also Our Company purpose and culture and sound judgment. ensures that, in making its decisions, these create sustainable, long- The Board is responsible for establishing During the year, the Board has focused term value for the mutual benefit of Severn Trent’s purpose, vision and on deepening its understanding of the stakeholders. In order for the Group strategy, and satisfying itself that its Group’s culture even further, through a to manage risk effectively, the Board culture is aligned. Our purpose – to dedicated company purpose and culture monitors financial performance serve our communities and build a session in January 2019. lasting water legacy – reflects ‘why’ we and reporting and also ensures that The session was centred on the results do what we do. Our strategy provides appropriate and effective succession of the all employee survey ‘QUEST’ us with ‘what’ we do. But the ‘how’ we planning arrangements and and other relevant data. The Board deliver our purpose and strategy is what remuneration policies are in place. considered the positive and more differentiates us and sets us apart and challenging aspects revealed by the Page 72 details the main topics that is driven by our culture, values survey and discussed the Company’s discussed by the Board during the year. and behaviours. approach to addressing areas of Board Strategy Days To support the creation of long-term employee focus, such as health and value for the mutual benefit of our safety and gender neutral facilities at In addition to formal meetings at shareholders, employees, customers operational sites. which strategic matters are regularly and communities, we recognise the The Board routinely interacts with considered, in June 2018 the Board importance of building and promoting employees as part of their site visit held a dedicated strategy meeting a culture of integrity and openness, programme. Details of site visits held with the Executive Committee to focus where inclusion and diversity is during the year can be found on page 80. on PR19. This has been a matter of valued. Assessment of companies’ Direct interactions with employees, significant focus for the Board during organisational culture can sometimes specifically in relation to culture, allows the year. The day focused on the Group’s be hard to interpret and, as such, we’re the Board to understand first-hand the People Strategy, including culture, working with other companies to develop key issues identified by our workforce, talent acquisition, talent development, a new cultural index. This will allow and provides an opportunity to feedback talent management and organisational stakeholders to make comparisons specific insights to them. performance. The Strategy Day also against reliable data points, with clear covered the potential for artificial external benchmarks and give greater The findings from the culture session intelligence, data analytics and robotic visibility on companies’ progress. are being used to inform future areas process automation to improve The initial measures we are considering of focus for the Board moving forward. efficiency and performance across the are set out in the table below. As part of this activity the Board satisfied business – driving quality improvements itself that the Group’s policies, practices At the heart of Severn Trent’s culture is and minimising the need for manual and behaviour throughout the business a closely held set of values – Doing the intervention. The Board was immersed are wholly aligned with Severn Trent’s Right Thing. These values embody the in Strategy Day topics through use of real purpose, vision and strategy. examples and simulation to demonstrate principles by which the Group operate, current and planned interventions. and provide a consistent framework for For 2019, a portion of the strategy responsible business practices. meeting will focus on AMP7 delivery plans, following Severn Trent Water’s plan for the five years from 2020 being fast-tracked by Ofwat.

Cultural Index Topic Measures Benchmark Engagement • Glassdoor Rating • Glassdoor • Engagement score • Versus UK Average Fairness • Gender Pay Gap • Median Versus UK Average (ONS) • CEO Pay Ratio • Versus UK Average • Ethnicity Pay Ratios • TBC when Government standard disclosed Wellbeing • Days lost to mental health issues • Mind – Workplace Wellbeing Index • Employee turnover • CIPD Inclusion • Gender representation at senior levels • Hampton-Alexander Ranking • Social Mobility • Social Mobility Index • Ethnic Diversity • BITC Diversity Index Skills • Training Days • CIPD • Levy Spend • UK Government

Severn Trent Plc Annual Report and Accounts 2019 75 Governance

Leadership and Effectiveness Reinforcing our culture

Severn Trent’s values support Doing the Right Thing and drives delivery of the Group’s strategy

We put our We are We act with We protect our We are inspired customers passionate integrity environment to create an first about awesome what we do company

Educating our people, supporting and guiding them to demonstrate positive behaviours in all they do

Doing the Right Thing has These policies are the To support understanding of supporting policies that apply strategic link between our our policies and standards, to everyone who works for vision and how we manage there is programme of Severn Trent. our day-to-day business, targeted training, including and are underpinned by e-learning modules and specific company standards practical training sessions. and procedures.

Read more Page 95

Review mechanisms to further support and assess our culture

Our workforce can raise Reports from the respective Dedicated culture discussions concerns at work through Chairs are provided to the are included at our Employee their line manager, senior Board at the outset of every Forum, hosted by the management and through our meeting, with any serious Company and attended by the confidential and independent allegations being directly Chairman, Non-Executive whistleblowing helpline, reported to the Board. Directors and Executive ‘Safecall’. All investigations Directors. This regular Forum Our annual employee are carried out independently is attended by numerous engagement survey, ‘QUEST’, with findings being reported employee representatives, provides data in a clear directly to the Audit and Unions and other stakeholders and comprehensive form, Corporate Responsibility to enable the views identifying what’s going well Committees. The Audit throughout the organisation and where we can improve Committee monitors and to be considered at Board across the Group. QUEST is reviews the effectiveness of level. Individual Directors conducted by an independent the Group’s whistleblowing provide feedback at the research company to ensure arrangements annually Board meetings following the results are anonymous and provides feedback to Forum attendance. and the results are reported to the Board. the Board.

Feedback to the Board to deepen its understanding of the Group’s culture

Our established reporting mechanisms for company purpose and culture are essential tools in the Board’s oversight of cultural matters. All feedback received deepens the Board’s understanding of the Group’s culture and Board feedback is used to inform future areas of focus and ensure that local plans are consistent with feedback received.

76 Severn Trent Plc Annual Report and Accounts 2019 Strategic report > Governance Group financial statements Company financial statements Leadership and Effectiveness Other information Board evaluation

The effectiveness of the Board is reviewed at least annually, Evaluation Process and conducted according to the guidance set out in the Code and FRC Step 1. 2018/19 Process planning Guidance on Board Effectiveness. The Company Secretary undertook a detailed review of the Board Effectiveness An externally facilitated evaluation evaluation process and made revisions to incorporate recommendations was last conducted by Manchester and areas of focus highlighted in the 2018 Code and FRC Guidance on Square Partners in 2017/18, with the Board Effectiveness. next externally facilitated session A process for comprehensive one-to-one meetings was developed for the scheduled for 2021. Board and its Committees, with interview questions structured on the basis of The 2018/19 evaluation was internally feedback from the 2017/18 evaluation, including areas for improvement and any conducted by the Chairman with support additional observations. from the Company Secretary through a series of one-to-one meetings in January Step 2. One-to-one meetings and February 2019. Separate meetings Board and Committee members participated in comprehensive one-to-one were held to consider the effectiveness of meetings with the Company Secretary, with appropriate time provided to allow the Chief Executive, led by the Chairman, detailed discussion to take place. and of the Chairman, led by the Senior Step 3. Evaluation and reporting Independent Director. The Company Secretary compiled the individual responses, including analysis Following completion of the evaluation of themes and proposed actions. A detailed report, setting out the findings of process, the Board considered the the evaluation was provided to the Chairman for consideration. The Company report’s findings and agreed specific Secretary and Chairman met to discuss the findings, with the resulting report actions. It was also agreed that six- being tabled to the Nominations Committee and Board in March 2019. monthly reviews on progress against the report’s recommendations would Step 4. Agree actions and monitor progress be tabled for Board discussion. The findings of the evaluation exercise were fully considered when making recommendations in respect of the re-election of individual Directors and included an assessment of their independence, time commitment and individual performance.

1 4 2018/19 Agree actions Process and monitor planning progress

Evaluation process

3 2 Evaluation and One-to-one reporting meetings

Severn Trent Plc Annual Report and Accounts 2019 77 Governance

Leadership and Effectiveness continued Board evaluation

Evaluation Findings The evaluation also concluded that As part of the evaluation, full the Board, its Committee Chairs and consideration was given to the number The evaluation concluded that excellent Committees were effective and that of external positions held by the Non- progress had been made in respect of all Directors were considered to have Executive Directors. Directors’ other areas for further focus identified in the demonstrated considerable commitment appointments were reviewed, including 2017/18 review as detailed below. and time to their roles, well in excess the time commitment required for The key theme highlighted in the 2018/19 of that required by the Charter of each. As a result of this review, the evaluation was positive Board discussion Expectations notwithstanding any Nominations Committee did not identify dynamics. It was noted that all Directors other positions held by them outside any instances of overboarding and fostered a culture of open, constructive of Severn Trent. confirms that all individual Directors have sufficient time to commit to their debate, undertaken by a respectful Minor areas for further development appointment as a Director of Severn and cohesive, and appropriately of the Board’s effectiveness were as Trent Plc. The full list of external challenging Board. detailed below. appointments held by our Directors can be found on pages 66 to 67. All of our Non-Executive Directors are considered to be independent.

Evaluation findings Evaluation Action 2017/18 Progress 2018/19 Balance of Debate – continue to Separate, dedicated PR19 meetings were scheduled outside the normal Board and maintain focus on strategic, operational Committee timetable, to reduce the pressure on the Board agenda and maintain focus and reputational priorities as well on strategic, operational and reputational priorities. as regulatory matters. During the 2018/19 evaluation, the Board noted that PR19 approval and submission had been particularly well managed and that the use of additional Board Committee meetings and briefing papers had ensured that this topic had not distracted the Board from considering other strategic issues and operational performance oversight. Talent Management and Succession Talent and succession planning have been added as separate standing Nominations Planning – opportunity to apply more Committee agenda items with a forward Board programme for talent and succession structure to succession planning and planning also being developed. talent development discussions at the Existing talent and succession planning elements of the Board induction programme were Nominations Committee and the Board. updated to give new Non-Executive Directors better oversight of the Group’s processes. Board Composition – opportunity to Succession planning was considered by the Nominations Committee, and Board, during the increase the ethnic diversity of the year. This included consideration of the Board’s Diversity Policy and its aims to increase Board in line with the recommendations the ethnic diversity of the Board in line with the recommendations of the Parker Review. of the Parker Review and to appoint The Board also considered Board succession planning in respect of Directors with more an additional Director with Treasury/ Treasury and Engineering experience. Engineering experience. Financing – opportunity to spend more Relevant sections of the Board induction materials have been reviewed during the year. time on this topic during NED induction The Board induction programme now includes two additional face-to-face sessions with the given its complexity. finance team to provide the opportunity to clarify and deepen Director knowledge. Culture – develop a structured plan to Company purpose and culture continues to be considered by the Board as a separate Board enable the views, ideas and constructive agenda item. Additional detail can be found on page 75. challenge throughout the organisation The Chairman and Non-Executive Directors will continue to attend our Employee Forum. to be considered at Board level. This regular Forum is attended by numerous employee representatives, Unions and other stakeholders to enable the views throughout the organisation to be considered at Board level. Individual Directors provide feedback at the Board meetings following Forum attendance.

Minor areas for further development of the Board’s effectiveness Evaluation Action 2018/19 Succession Planning Opportunity to apply more focus to succession planning, in full consideration of Director tenure. Read more on succession planning activity following year end on page 84. Balance of Debate The Board noted the excellent chairing of Board discussions despite challenging agendas during the year. Opportunity to allocate additional time on the Board agenda to engage personally with presenters and discuss matters more informally. Board Composition Opportunity to consider broader diversity and inclusion in terms of the Board’s composition.

Remit of Board Committees Opportunity to review the duties within the respective Committee Terms of Reference and ensure that Committee meetings have sufficient time allocated to them.

78 Severn Trent Plc Annual Report and Accounts 2019 Strategic report > Governance Group financial statements Company financial statements Leadership and Effectiveness Other information Effectiveness

Board Development Our Regulators Induction programme and Knowledge To deepen Board level understanding of We have an established induction our Regulators, our Chairman and Non- programme in place which can be Training and Continuing Executive Directors formally met with tailored to meet the requirements of Professional Development (‘CPD’) our Regulator, Ofwat, five times during individual Directors and includes the As well as Board agenda items, training the year. following elements/details: and CPD sessions in relation to specific • Ofwat pre-appointment process; topics of interest were presented to the Informal Board interactions Board during the year, as follows: The Board regularly meets more • Our business and how we are informally, in the form of Board dinners, regulated, including performance; • Severn Trent Academy; outside of the scheduled Board meeting • Our Non-Regulated Business, • Leakage Innovation; calendar. These sessions are convened to build and maintain successful including performance; • Birmingham Resilience; relationships and promote a culture • Strategy; • Customer Bills; of openness in Board discussions. Senior Management and external • Key operations and processes • Wonderful Water Tour (our Educational stakeholders (including Ofwat and the including an immersive, practical Buses). Read more on page 35; Water Forum) are invited to attend journey through the water and waste cycles; • Impact of Renationalisation; these sessions. • Key stakeholder relationships; • Robotics and Artificial Intelligence; Directors’ resources • Customer delivery; • Company Purpose and Culture; and An online resource library and CPD repository is available for use by the • Capital delivery and commercial; • Capital Spend. Directors, which is continually reviewed • How the business is financed and The aim of the training sessions is to and updated. The library includes financial performance including continually refresh and expand the a Corporate Governance Manual, a analyst and investor opinion; Board’s knowledge and skills. In doing Results Centre and Investor Relations so, the Directors can contribute to section and briefings on Board training • Our people and how we work, including discussions on technical and regulatory session topics. It also contains a further health, safety and wellbeing, talent matters more effectively. The sessions reading section which covers updates and succession, Trade Unions and an also serve as an opportunity for the and guidance on changes to legislation overview of our Remuneration Policy; Board to discuss strategy and risks and corporate governance best practice. • Risk and audit, including the Group risk with management below Executive The Directors also have access to profile and our approach to risk; Committee level and gain further professional development provided direct insight into our businesses and by external bodies and our advisers. • Face-to-face meetings with key management capability. CPD requirements were considered senior colleagues; through individual performance review meetings between the Chairman and • Directors’ duties; and each Director, as part of the internally • Governance matters and facilitated Board Effectiveness review Group policies. in 2018/19. We continually enhance the Board’s induction process, in full consideration of feedback from new appointees and the Board Effectiveness evaluation.

The Board immersed themselves in our Wonderful Water Tour – our innovative educational roadshow, inspiring the next generation.

Severn Trent Plc Annual Report and Accounts 2019 79 Governance

Leadership and Effectiveness continued Effectiveness

Operational and Site Visits The Board, and individual Directors, undertook three key site visits during the year, to deepen their understanding of the Group’s operations and further inform the Board’s decision-making in creating sustainable long-term value for the mutual benefit of stakeholders.

Site Objectives Key Board Considerations Minworth – Thermal • Practical demonstration of Health and Safety considerations • Health and safety Hydrolysis Plant on complex operational sites • Employee stakeholders and (‘THP’) • Employee expertise People Strategy • Overview and demonstration of the sludge treatment process • Operational knowledge and operations • Technology • Overview of THP process and its importance to the Group, • Environment including implementation of technological advances • Process optimisation across the Minworth site • Site sampling and performance record • Environmental Lake Vyrnwy • Practical demonstration of Health and Safety considerations on • Customer and community experience Reservoir and publicly accessible sites • Environment Visitor Site • Tour and briefing on educational programmes delivered at the site • Health and safety • Tour of conservation programmes, including the RSPB Organic Farm • Employee stakeholders and and SSSI site People Strategy • Opportunity to interact with employees • Operational knowledge • Overview of Lake Vyrnwy’s infrastructure • Infrastructure • Catchment Management activities • Environment • Biodiversity activities • Biodiversity Agrivert • Practical demonstration of health and safety considerations on • Health and safety complex operational sites • Employee stakeholders and • Employee expertise and opportunity to interact with employees People Strategy • Overview and demonstration of the anaerobic digestion process • Operational knowledge and operations, including implementation of technological advances • Technology • Process optimisation across the Agrivert site • Environment • Environmental

The Board spent time observing anaerobic digestion processes at our Agrivert site and were hugely impressed by the engineering capability and expertise of our people.

80 Severn Trent Plc Annual Report and Accounts 2019 Strategic report > Governance Group financial statements Company financial statements Nominations Committee report Other information Leadership & Effectiveness

Dear Shareholder During the year, the Committee has spent a significant proportion of its Chairman’s I am pleased to introduce this report time overseeing the evaluation of the which details the role of the Committee Board, its Committees and Directors. and the important work it has We also spent time considering the message undertaken during the year. The pages development of our talent pipeline that follow provide additional detail for Directors and high performing on the activities and discussions of individuals below Board level, with a the Committee and share the matters focus on the need for diversity. As part of considered by the Committee and steps the Board Effectiveness evaluation, the taken to address any actions. Committee evaluated the structure, size, The Committee plays a key role in composition and succession needs of the supporting the Board within the Board. Additional detail can be found on Governance Framework in reviewing page 77. the composition of the Board and its As mentioned in my Chairman’s Committees. This includes assessing statement on page 16, I believe this whether the balance of skills, experience, is the right moment to step down knowledge and independence on the and allow a new Chair to lead the Board is appropriate to enable it to Board into the next phase for Severn operate effectively. The Committee also Andrew Duff Trent. The Committee, led by Senior assisted the Board in its consideration Independent Director Kevin Beeston, is Chairman of the of conflicts of interest and independence Nominations Committee overseeing the process ahead of making issues. No conflicts of interest or a formal recommendation to the Board. independence issues were identified as The Committee is in the initial stages of Attendance table a result of this activity. succession planning and it is planned Committee Meetings Max Throughout the year, increased focus to formally announce my successor in Member attended possible continued to be given to the Group’s due course. In line with the provisions of Andrew Duff 4 4 succession, contingency planning and our Board Diversity Policy, any executive (Chairman)1 diversity needs. Discussion centred search firms involved will be signed up to John Coghlan2 4 4 on the importance of developing, the voluntary code of conduct on gender and BAME diversity and best practice. Dominique 4 4 and maintaining, a diverse range of Kevin Beeston will continue to chair Reiniche2 perspectives, skills, experiences and expertise, essential to ensuring our long- all meetings of the Committee when it Kevin Beeston2 4 4 term viability and commercial success. meets to discuss this matter. 2 Philip Remnant 4 4 More information on our diversity Andrew Duff Angela Strank2 4 4 initiatives can be found in the Strategic report on page 44. Chairman of the Nominations Committee The Committee held four meetings The members of the Committee in during the year and has met twice since 2018/19 were the Non-Executive the end of the financial year. I would like Documents available at severntrent.com Directors of the Board. Only members of to thank the members of the Committee Nominations Committee Terms the Committee have the right to attend for the open discussions that take place of Reference Committee meetings. Other individuals at our meetings and the importance they Board Diversity Policy Statement such as the Chief Executive, the all attach to its work. Director of Human Resources, senior Group Conflicts of Interest Policy management and external advisers may be invited to attend meetings as and when appropriate. The Committee’s Terms of Reference were updated in March 2019.

1. Independent on appointment. 2. Independent Non-Executive Director.

Severn Trent Plc Annual Report and Accounts 2019 81 Governance

Nominations Committee report continued Leadership & Effectiveness

Key areas of Nominations Committee focus in 2018/19 A summary of the matters considered at each meeting is set out below: July 2018 • Preparations for the 2018 UK Corporate Governance Code November 2018 • STEC Succession Planning January 2019 • NED Tenure Review and Succession Planning • Workforce Engagement, including individual Director commitments March 2019 • Board Effectiveness Report 2018/19 • Continuing Office of Directors • Board Composition and Independence • Conflicts of Interest: Annual Review • Diversity and Inclusion Update April 2019 • Board Succession Planning May 2019 • Board Succession Planning • Talent Development and STEC Succession Planning • Nominations Committee Report within the Annual Report and Accounts

Diversity The Board remains focused on promoting of greater diversity, including gender broader diversity, and creating an inclusive diversity, social and ethnic background As highlighted earlier in the report, the culture in line with the recommendations and cognitive and personal strengths Board and Nominations Committee of the Parker and McGregor-Smith throughout the organisation, including continue to drive the agenda of diversity reviews. A diverse organisation benefits on the Board itself. Although no targets across the Group and are proud of the from differences in skills, regional and have been set at present, the benefits progress made, especially in respect industry experience, background, race, that diversity brings to the Board are of female representation on the Board gender, sexual orientation, religion, belief wholly recognised by the Committee and and Executive Committee (now at 37.5% and age, as well as culture and personality. is evidenced through the commitments and 36% respectively). A breakdown by made in the Policy. gender of the number of persons who The Board Diversity Policy (the ‘Policy’) were Directors of the Company, senior was reviewed by the Committee in The objectives of the Policy, and an managers and other employees as at January 2019, with recommended update against each of them, are 31 March 2019 is set out below. updates approved by the Board. As part set out on page 83. A copy of the of Board discussions, recognition was Policy Statement is available on the given to the importance and benefits Severn Trent Plc website.

Gender diversity at 31 March 2019 Severn Trent Board diversity ﬁgures as at 31 March 2019 Strategic Leader and Director Group Director gender split Non-Executive tenure 1 1 1 1 3

2 2 2 2

1. Male 60.00% 1. Male 70.50% 1. Male 62.50% 1. 1-3 years 2 2. Female 40.00% 2. Female 29.50% 2. Female 37.50% 2. 4-6 years 3 3. 6+ years 1 Apprentices Graduates 1 1 2

1. Male 86.57% 1. Male 60.76% 2. Female 13.43% 2. Female 39.24%

82 Severn Trent Plc Annual Report and Accounts 2019 Strategic report > Governance Group financial statements Company financial statements Other information

Board Diversity Policy – Objectives and Progress Policy Objectives Implementation Progress against objectives Ensure the Board comprises an Annual review of the Board’s composition At its March meeting, the Committee formally appropriate balance of skills, experience by the Nominations Committee each year reviewed the composition of the Board and the and knowledge required to effectively with particular consideration being given performance, contribution and commitment oversee and support the management of to the balance of skills, experience and of individual Directors in the context of the the Company. independence of the Board. Board Effectiveness evaluation. No concerns were raised in relation to the composition of Board Effectiveness evaluation specifically the Board. considers the composition of the Board and the contribution, commitment and Regular updates in respect of succession independence of individual Directors. planning fully consider the Board’s Diversity Policy and its aims to increase the ethnic diversity of the Board in line with the recommendations of the Parker and McGregor-Smith Reviews. The Board also considered Board succession planning in respect of Directors with specific experience in Treasury and Engineering.

Ensure consideration is given to The Board and Nominations Committee No Board appointments were made during candidates for Non-Executive Director recognise the importance and benefits of the year, however all recommendations in Board appointments from a wide pool, greater diversity including gender diversity, respect of future Board appointments will be including those with no listed company social and ethnic background and cognitive conducted in full consideration of the Policy, Board level experience. and personal strengths, throughout the 2018 Code and additional relevant guidance. organisation, including on the Board itself. On instruction of an executive search firm, the specification will ensure that candidates with no listed company Board experience are fully considered.

Ensure Board appointment ‘long lists’ The Board and Nominations Committee No Board appointments were made during include diverse candidates, including recognise the importance and benefits of the year, however all recommendations in diversity of social and ethnic backgrounds greater diversity including gender diversity, respect of future Board appointments will be and cognitive and personal strengths. social and ethnic background and cognitive conducted in full consideration of the Policy, and personal strengths, throughout the 2018 Code and additional relevant guidance. organisation, including on the Board itself. The Company only engages with executive search firms who have signed up to the voluntary code of conduct on gender and BAME diversity and best practice.

Ensure the Board and Nominations The Company only engages with executive We continue only to engage with executive Committee only engage executive search search firms who have signed up to the search firms who have signed up to the firms who have signed up to the voluntary voluntary code of conduct on gender and voluntary code of conduct on gender and Code of Conduct on gender diversity and BAME diversity and best practice. BAME diversity and best practice. best practice.

Ensure focus is given to the development Regular Board and Nominations At its March meeting, the Nominations of a pipeline of diverse high calibre Committee consideration of the importance Committee considered Diversity and Inclusion candidates for Board level roles. and benefits of greater diversity including within the Group. The Board committed to gender diversity, social and ethnic building on existing graduate, apprentice background and cognitive and personal and leadership programmes to embed strengths. This includes representation of inclusivity in our succession planning and these cohorts in the Group’s talent pipeline talent development work. This included and on the Board itself. discussion on strengthening our talent pipeline, with an enhanced focus on ensuring appropriate representation from minority ethnic candidates, as well as other relevant diverse cohorts. This was also an area of specific focus within the Board Succession Planning discussions that took place during the year.

Severn Trent Plc Annual Report and Accounts 2019 83 Governance

Nominations Committee report continued Leadership & Effectiveness

Talent development Our innovative delivery model for the • in the Committee’s opinion, Andrew water process technician standard has Duff remains a very strong and We recognise the importance of allowed us to design a programme that effective Chairman, who is independent developing our people and, as such, ensures high quality apprenticeship of management and provides robust talent management remains a key topic training delivered in just 24 months – challenge. The findings of the Board of discussion. The Group’s five year talent significantly faster than any previous effectiveness evaluation support plan focuses on building technical and schemes. Elsewhere in the industry this view. leadership capability, and creating talent this course would take at least 36 – In the year ahead, the Committee pipelines for the future. 48 months to complete. will focus on ensuring a smooth and We have a total of 78 graduates in Succession planning orderly handover and induction, in training, with 43 places offered in conjunction with the Company Secretary. 2018. We currently have five entry Kevin Beeston led the discussion on Kevin Beeston will continue to Chair programmes for graduates – Business the process of succession planning all meetings of the Committee when it Leadership, Finance, IS, Engineering and for Andrew Duff, who has been on meets to discuss this matter. Project Management. Our placement the Board since May 2010 and has programme for undergraduates offers been our Chairman since July 2010, Director conflicts and a range of summer and 12 month therefore reaching the nine year limit independence placements across Engineering, Finance for Chairs specified in the 2018 Code. and the Visitor Experience teams. The Committee is in the initial stages of In March 2019, the Committee We filled 23 roles in 2018 with a new succession planning and it is planned to conducted its annual review of individual opportunity in the Quantity Surveying formally announce Andrew’s successor in Director conflict authorisations as team being offered in 2019. due course. In line with the provisions of recorded in our Conflicts of Interest Register. Additionally, the Board and We currently have 133 apprentices in our Board Diversity Policy, any executive search firms involved must be signed up its Committees consider conflicts of training. In 2018, we launched three new interest at every meeting, and the Board apprenticeship programmes in HR, Legal to the voluntary code of conduct on gender and BAME diversity and best practice. reviews the authorisation of any potential and Vehicle Technician. We now have 11 conflicts of interest every six months. active apprenticeship programmes, and The Committee looks forward to we expect this to increase to 13 in 2019. appointing a well-qualified and high The Conflicts of Interest Register sets out any actual or potential conflict of We have been a key partner in the calibre Chair in due course, and does not believe that it would be in the interests interest situations which a Director development and implementation of has disclosed to the Board in line with the new water industry apprenticeships of shareholders for this to take place immediately, for the following reasons: their statutory duties. When reviewing standards through the Government’s conflict authorisations, the Committee Trailblazer initiative. As one of the 13 • it would be beneficial for the new Chair considers any other appointments held firms making up the employer group, we to be able to join the Board and work by the Director as well as the findings have ensured that Severn Trent has been alongside Andrew Duff for a period of the Board Effectiveness evaluation. at the forefront of its development. before they step up to become Chair; Following the review, the Committee • a search for a high quality candidate recommended to the Board that takes time and the Committee does each conflict authorisation remained not want to rush this important search; appropriate. There were no new potential and conflict situations during the year. The independence of our Non-Executive Directors is formally reviewed annually by the Nominations Committee, and as part of the Board evaluation exercise. The Nominations Committee and Board consider that there are no business or other circumstances that are likely to affect the independence of any Non-Executive Director and that all Non-Executive Directors continue to demonstrate independence. In accordance with the Code, all the Directors will retire at this year’s AGM and submit themselves for re-election by shareholders. Each of the Non- Executive Directors seeking re-election are considered to be independent in judgment and character.

The Nominations Committee spent time meeting an engineering apprentice at our Minworth site.

84 Severn Trent Plc Annual Report and Accounts 2019 Strategic report > Governance Group financial statements Company financial statements Audit Committee report Other information Accountability

Dear Shareholder During the year, the Committee spent a significant proportion of its time Chairman’s I am pleased to introduce this report overseeing the development of PR19 which details the role of the Audit plans for Severn Trent Water and Hafren Committee and the important work it Dyfrdwy. Other significant parts of message has completed during this pivotal year the Committee’s work this year have for Severn Trent. The pages that follow included: Enterprise Risk Management, provide more detail on the activities of consideration of Internal Audit reports; the Committee and provides an overview oversight of the relationship with of the significant issues the Committee the External Auditor; including the assessed and steps taken to address assessment of its ongoing objectivity any issues. and independence; overseeing the The Committee has continued to play assurance of regulatory returns made a key role within the Governance by Severn Trent Water and Hafren Framework in discharging its oversight Dyfrdwy; oversight of wholesale charges; responsibilities for the integrity of the new connections charging; customer Company’s financial statements and ODI forecast; Company Monitoring matters relating to the Group’s system of Framework and the Water Resource internal controls and risk management. Management Plans for both Severn Trent We continue our focus on ensuring Water and Hafren Dyfrdwy. John Coghlan the adequate mitigation of current and Chairman of the Audit Committee As part of the Committee’s oversight emerging risks faced by the Group. of regulatory reporting obligations in Additional detail of how we carried out respect of Severn Trent Water and Hafren Attendance table our risk assessment activities and how Dyfrdwy, the Company has reviewed we identify and manage risks can be Committee Meetings Max the effectiveness of its governance Member attended possible found on page 54 of our Strategic report. arrangements for these subsidiaries John Coghlan1 4 4 The Committee held four scheduled during the year. Following this review, (Chairman) meetings during the year and has met modifications to the Audit Committee Philip Remnant2 4 4 once since the end of the financial year. meeting structure have been Kevin Beeston3 4 4 An additional four Committee meetings implemented to facilitate dedicated were held during the year, the details of Committee focus for Hafren Dyfrdwy which are described within this report. regulatory matters. These arrangements I would like to thank the members of are assisted through the management In addition to the attendance set out the Committee, the management team, of separate agenda items for Hafren above, the Chairman, the CEO, the Internal Audit and our External Auditor, Dyfrdwy matters, with the Independent CFO, the Head of Internal Audit, the Deloitte, for their continued commitment Non-Executive Directors of Hafren Group Financial Controller and the throughout the year, and for the open Dyfrdwy being invited to attend all External Auditor normally attend, by discussions that take place at our relevant meetings in respect of Hafren invitation, all meetings of the Committee. meetings, and for the importance they Dyfrdwy matters. Regular updates on Other members of Senior Management all attach to its work. the regulatory matters considered by are also invited to attend as appropriate. the Audit Committee on behalf of Hafren The Committee’s performance was The Committee regularly holds Dyfrdwy are also reported at each assessed as part of the annual Board private discussions with the Head meeting of the Hafren Dyfrdwy Board, effectiveness evaluation. I am pleased to of Internal Audit and the External with more formal reporting on a six report that the Committee is regarded Auditor separately, without Executive monthly basis. as operating effectively and the Board management present. The Committee takes assurance from the quality of John Coghlan Chairman regularly holds separate one- the Committee’s work. The Board is to-one meetings with the CFO, the Head Chairman of the Audit Committee satisfied that the Committee members of Internal Audit, the External Auditor bring a wide range and depth of financial and with Committee Members outside and commercial experience across Documents available at severntrent.com the meetings to better understand any various industries. All members have Audit Committee Terms of Reference issues or areas for concern. competence relevant to regulated and/or Non-Audit Services Policy The Committee’s Terms of Reference utilities businesses as well as significant were updated in March 2019. recent and relevant financial experience.

1 Recent and relevant financial experience as a member of the Institute of Chartered Accountants in England and Wales and John was previously Deputy Chief Executive and Group Finance Director of Exel PLC. 2 Recent and relevant financial experience as a fellow of the Institute of Chartered Accountants in England and Wales. 3 Recent and relevant financial experience as a fellow of the Chartered Institute of Management Accountants and Kevin was previously Finance Director at Serco Plc.

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Key areas of Audit Committee focus in 2018/19 A summary of the matters considered at each meeting is set out below: May 2018 Scheduled meeting • Financial results announcement 2017/18 Financial Reporting • Severn Trent Plc Annual Report and Accounts 2017/18 • Severn Trent Water Limited Annual Report and Accounts 2017/18 • Viability Statement and Going Concern • Deloitte Full Year Audit Report External Audit • Internal Audit update Internal Audit • Assurance Map update • PR19 Assurance Plan Regulatory • Internal control and risk management effectiveness for Severn Trent Plc and Severn Trent Water Internal Control and Risk • Whistleblowing update Management • Fair, balanced and understandable assurance process: Severn Trent Plc and Severn Trent Water Governance • Relevant Audit Information process: Severn Trent Plc and Severn Trent Water June 2018 Additional meeting • Annual Performance Report and Annual Regulatory Compliance Statement for Severn Trent Water Regulatory • PR14 Reconciliation for Severn Trent Water and Dee Valley Water Limited (now Hafren Dyfrdwy) July 2018 Additional meeting • Hafren Dyfrdwy Annual Report and Accounts 2017/18, including Viability Statement and Going Concern Financial Reporting • Hafren Dyfrdwy Enterprise Risk Management Update, including Principal Risks for the Annual Report Internal Control and Risk • Internal control and risk management effectiveness for Hafren Dyfrdwy Management • Whistleblowing update • Annual Performance Report and Annual Regulatory Compliance Statement for Hafren Dyfrdwy Regulatory • PR19 Assurance Plan for Hafren Dyfrdwy • Fair, balanced and understandable assurance process: Hafren Dyfrdwy Governance August 2018 Additional meeting • PR19 Plan – Severn Trent Water Regulatory • PR19 Plan – Hafren Dyfrdwy September 20181 Scheduled meeting • External Audit 2018/19 plan and terms of engagement External Audit • External Audit Review of non-audit fees • Internal Audit update Internal Audit • Scheme of Wholesale Charges Regulatory – SEVERN TRENT WATER • Scheme of Wholesale Charges Regulatory – HAFREN DYFRDWY • Enterprise Risk Management update Internal Control and Risk • Whistleblowing update Management • Review of effectiveness of Whistleblowing arrangements November 2018 Scheduled meeting • Interim financial results 2018/19 Financial Reporting • Deloitte Interim Audit Report External Audit • Internal Audit update Internal Audit • Assurance Map update • Customer ODI Forecast and Assurance Regulatory – SEVERN TRENT • Company Monitoring Framework Risk Statement WATER • General Data Protection Regulation review • Customer ODI Forecast and Assurance Regulatory – HAFREN • Company Monitoring Framework Risk Statement DYFRDWY • Cyber review Internal Control and Risk • Whistleblowing update Management • Material Litigation Report and Legal Compliance Report Governance January 2019 Additional meeting • Water Resources Management Plan Regulatory – SEVERN TRENT • New Connections Charging WATER • Water Resources Management Plan Regulatory – HAFREN DYFRDWY

1. Modifications to the Audit Committee meeting structure were implemented in September 2018 to facilitate dedicated Committee focus for Hafren Dyfrdwy regulatory matters.

86 Severn Trent Plc Annual Report and Accounts 2019 Strategic report > Governance Group financial statements Company financial statements Other information

March 2019 Scheduled meeting • Accounting Policies update Financial Reporting • Viability Statement and Going Concern • Review of effectiveness of External Auditor External Audit • Review of Non-Audit services • Internal Audit update Internal Audit • Assurance Map update • Internal Audit Plan 2019/20 • Water Resources Market Information Regulatory – SEVERN TRENT • Process and Timeline for Assuring the 2018/19 Regulatory Reporting Requirements WATER • WICS Compliance Statement • General Data Protection Regulation Review • Board regulatory statements – forward plan • Water Resources Market Information Regulatory – HAFREN • Process and Timeline for Assuring the 2018/19 Regulatory Reporting Requirements DYFRDWY • Enterprise Risk Management update Internal Control and Risk • Bribery and Fraud Prevention and Detection review Management • Whistleblowing update • Preparations for the 2018 UK Corporate Governance Code Governance • Audit Committee Terms of Reference • Material Litigation Report and Legal Compliance Report • Year End Governance Matters: ––Fair, balanced and understandable assurance process ––Relevant Audit Information process ––Audit Committee report within the Annual Report and Accounts May 2019 Scheduled meeting • Financial results announcement 2018/19 Financial Reporting • Severn Trent Plc Annual Report and Accounts 2018/19 • Severn Trent Water Limited Annual Report and Accounts 2018/19 • Viability Statement and Going Concern • Deloitte Full Year Audit Report External Audit • Internal Audit update Internal Audit • Annual Performance Report for Severn Trent Water Regulatory – SEVERN TRENT • Assurance of ODI Performance WATER • Annual Performance Report for Hafren Dyfrdwy Regulatory – HAFREN • Assurance of ODI Performance DYFRDWY • Internal control and risk management effectiveness Internal Control and Risk • Cyber update Management • Whistleblowing update • Fair, balanced and understandable assurance process: Severn Trent Plc and Severn Trent Water Governance • Relevant Audit Information process: Severn Trent Plc and Severn Trent Water

In reviewing the financial statements, The Disclosure Committee reviews the Committee receives input from the the proposed presentations to Disclosure Committee, a sub-committee analysts in conjunction with the draft of the Executive Committee which is results announcements for both the chaired by the CFO. It is responsible for interim and full year results, applying overseeing the Group’s compliance with particular attention to the tone of the its disclosure obligations, considering announcements and presentations the materiality, accuracy, reliability and to maintain consistency with the timeliness of information disclosed and financial statements. assessment of assurance received.

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Significant financial statement The Committee receives detailed reports The Committee discusses the range reporting issues from both the CFO and the External of possible treatments both with Auditor on these areas and on any other management and with the External The Committee looked carefully at those matters which they believe should be Auditor and satisfies itself that the aspects of the financial statements drawn to the attention of the Committee. judgments made by management are which required significant accounting The Committee also reviews the draft robust and should be supported. judgments or where there was of the External Auditor’s report on the The significant issues that the Committee estimation uncertainty. These areas financial statements, with particular considered in 2018/19 are set out below. are explained in note 4 of the Group reference to those matters reported as financial statements. carrying risks of material misstatement. For all of the matters described below the Committee concluded that the treatment adopted in the Group financial statements was appropriate.

Significant financial statement reporting issues Issue How the issue was addressed by the Committee Going concern basis for the financial statements and long-term The Committee reviewed and challenged the evidence and viability statement. assumptions underpinning the use of the going concern assumption in preparing the accounts and in making the statements in the Strategic report on going concern and long-term viability. Determination of the provision for impairment of trade receivables The Committee challenged the changes made to the methodology in Severn Trent Water Limited. for calculating the provision during the year and critically appraised management’s explanations for these changes. At 31 March 2019, the provision in Severn Trent Water Limited’s financial statements was £115.2 million and the charge for the year The Committee considered the work performed by the External was £24.2 million. Auditor and the conclusions they reached regarding the adequacy of the provision. Severn Trent Water Limited has a statutory obligation to continue to supply water and waste water services to customers even when The Committee determined that no adjustment to the amounts their bills are unpaid. This increases the risk of bad debts. In recorded was required. addition it has a large and diverse customer base which requires impairments against trade receivables to be assessed on a systematic basis. Revenue recognition in relation to the estimation of metered The Committee does not consider that there is a significant risk of a revenue from the new non-household retail market in Severn Trent material adjustment in respect of this estimate in the next financial Water Limited. year because the estimated amount is not material. Nevertheless, the Committee considered this to be a significant issue because the In the year ended 31 March 2019, Severn Trent Water Limited systems and processes are new and the amounts recognised are recognised £379 million in revenue from sales to retailers in the subject to management judgment. new non-household retail market. The Committee reviewed the process for calculating the metered On 1 April 2017, the non-household retail market in England revenue estimate from non-household retailers and considered opened to competition. This enabled all non-household customers the reasonableness of the estimates in the light of emerging trends to choose their water and waste water supplier although and the experience of other market participants. The Committee wholesale services remained with the incumbent companies. scrutinised management’s evidence supporting its judgments and Market Operator Services Limited (‘MOSL’) was established examined the data from the underlying evidence. The Committee to operate the market and to provide data to wholesalers and discussed the External Auditor’s work and their conclusions. retailers to allow settlement between market participants to take place. MOSL provides data for monthly settlement periods The Committee determined that the approach taken by management based on actual meter readings and estimations extrapolated was reasonable and that no adjustment was required to the amounts from the last known meter read. This is an iterative process with recognised in the financial statements. subsequent settlement runs including more actual readings for the same period. Empirical observations have shown that metered consumption is consistently higher than the previous estimates. The proposed classification of costs between operating The Committee considered the application of the Group’s accounting expenditure and capital expenditure in Severn Trent Water Limited. policies in relation to capital expenditure during the year. Severn Trent Water Limited has a significant capital programme The Committee enquired of management whether the policies had that includes projects made up of a combination of expenditure been applied consistently from year to year and sought explanation and activities, some of which are recognised as property, plant and for the increase in amounts capitalised. The Committee considered equipment and some of which are recognised as operating costs. the results of the External Auditor’s work and discussed the For most of the expenditure this distinction is clear but there is an conclusions with the External Auditor. element where subjective judgments are required to determine the The Committee determined that no adjustment to the amounts appropriate accounting treatment. recorded was required.

88 Severn Trent Plc Annual Report and Accounts 2019 Strategic report > Governance Group financial statements Company financial statements Other information

Issue How the issue was addressed by the Committee Determination of the amount of the Group’s retirement benefit The Committee scrutinised the assumptions underlying the obligations. valuation of the obligations, noting and probing assumptions that were not in line with their expectations, including developments At 31 March 2019, net retirement benefit obligations amounting to in respect of Guaranteed Minimum Pension (‘GMP’) rights. The £452.9 million were recognised. Committee considered whether the assumptions taken as a whole The net obligation recognised on the balance sheet is the were appropriate, taking into account the work of the External difference between the fair value of the schemes’ assets at the Auditor and the benchmark information provided by them. balance sheet date and the present value of the benefits expected to be paid to members of the schemes. This requires assumptions The Committee considered that the assumptions were reasonable to be made regarding expected age of retirement and longevity of and that no adjustment was required to the draft Group financial members, future inflation rates and increases to benefits. It is also statements. necessary to determine an appropriate discount rate to calculate the present value of the estimated gross obligations. Management takes advice from external qualified actuaries who perform the calculation of the present value of the benefits based on the assumptions set by management. Implementation of IFRS 9 and IFRS 15. The Committee considered the approach to determining expected lifetime credit losses on accounts receivable and in particular These accounting standards were adopted by the Group with effect challenged subjective judgments made by management relating to from 1 April 2018. The impacts of adoption are set out in note 2 future credit losses. to the Group financial statements. The main impact of IFRS 9 is in relation to the method of calculating the bad debt provision The Committee noted that the impact of these judgments was not (see above). material and concluded that these were reasonable. IFRS 15 introduced a new methodology for determining the The Committee challenged management’s analysis of the recognition of revenue. Management assessed its existing application of IFRS 15 to the water and waste water services and practices for recognising revenue against the methodology set out concluded that it was appropriate and in line with industry practice in IFRS 15, as explained in note 2 of the Group financial statements. in this area. There were no changes required to the recognition of revenue The Committee also challenged management’s application of IFRS from water and waste water services. The main impact in Business 15 to the Ministry of Defence contract, noting that the impact was Services was in relation to a 25 year contract with the Ministry not material, in particular the estimates of future revenue and costs of Defence. underpinning the calculation of revenue. The Committee concluded that the outcome was reasonable.

Internal control over • oversight by the Disclosure Committee The role of Internal Audit is to provide financial reporting of the Group’s compliance with its assurance that the Group’s risk disclosure obligations; and management and internal control The Group has established procedures systems are well designed and operate • monthly reviews by the Executive for exercising control and managing risk effectively and that any corrective action Committee and the Board of in relation to Group financial reporting is taken in a timely manner. Each year, financial reports from the Group’s and preparation of Group financial Internal Audit develops an annual operating businesses. statements including: risk-based audit plan for approval by • the formulation and communication Internal and External Audit the Audit Committee and performance of Group accounting policies dashboards to enable onward monitoring which are regularly updated for Internal Audit and internal controls of the plan’s execution. The Audit developments in IFRS and other Internal Audit is an independent Committee challenges the audit plan, reporting requirements; assurance function available to the specifically whether the key risk areas Board, Audit Committee and all levels of identified as part of the ERM process are • specification of a set of financial management. The Internal Audit function being audited with appropriate frequency controls that all of the Group’s is supported by two main co-sourcing and depth, and also by bringing an operating businesses are required to partners, PricewaterhouseCoopers and external view of risks the Company implement as a minimum; Ernst and Young. The arrangement is may be exposed to. The performance • a range of system, transactional reviewed annually and the Committee dashboards summarise the performance and management oversight controls believes this structure adds value, of the Internal Audit function over the embedded into our financial processes; through greater access to specific year against key measures and are areas of expertise, increased ability reviewed by the Committee twice a • deployment of a Group-wide to flex resources, and the ability to year. Following the completion of each consolidation system with controls to challenge management independently. planned audit, the Internal Audit function restrict access and maintain integrity Co-source specialists will continue to seeks feedback from management which of data; bring expertise to support the team and is reported through the performance • recruitment training and delivery of the audit plan where relevant. dashboards and assessed in turn by development of appropriately the Audit Committee twice a year. qualified and experienced financial The effectiveness of the controls over reporting personnel; financial reporting is also monitored by

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the Audit Committee, which receives The Committee considers the Non-audit services where the External regular reports of the testing conducted effectiveness of the External Auditor Auditor may be used include: audit- by the External Auditor. every year and a full effectiveness review related services required by statute or was conducted this year. The review regulation, services related to fraud, The Audit Committee is confident that, involved assessment of the Auditor by Corporate Responsibility report reviews where any failings or weaknesses are the Committee and key Executives and and regulatory support. identified in the course of its review of evaluation of whether the Auditor meets internal control systems, management During the year, Deloitte received minimum standards of qualification, puts in place robust actions to address £681,000 in fees for work relating to the independence, expertise, effectiveness these on a timely basis. An internal audit services they provide to the Group. and communication. control system can provide only Non-audit related work undertaken by reasonable and not absolute assurance The feedback collected through the Deloitte amounted to fees of £183,000 against material misstatement or loss, process has been shared with Deloitte this year, which amounts to 27% of the as it is designed to manage rather and an action plan has been drawn total audit fees paid to them. Fees paid than eliminate the risk of failure to up with them and built into the audit to Deloitte are set out in note 7 of the achieve business objectives. To ensure programme. Based on our consideration financial statements on page 153. continued efficiency, an external review of the responses to the effectiveness Details of significant non-audit work of the effectiveness of the Internal Audit review the Committee remains satisfied undertaken are set out on page 153. function was carried out in January with the efficiency and effectiveness of In approving these non-audit fees, the 2019. The review, performed by BDO, the audit. Committee considered the overall ratio concluded that the Internal Audit of non-audit fees to audit fees and, function is fit for purpose, is operating Non-audit fees given the scope of work, considered that efficiently and effectively and in line with The Company has approved a formal Deloitte was best placed to perform good practice. policy on the provision of non-audit services aimed at safeguarding and these services. External Auditor supporting the independence and Regulated subsidiaries Annually, the Committee reviews objectivity of the External Auditor. The regulated activities carried out the External Auditor’s audit plan and A copy is available on the Severn Trent by Severn Trent Water and Hafren reviews and assesses information Plc website. Dyfrdwy also require annual reporting provided by them confirming their The process for approving all non-audit submissions to Ofwat which are reviewed independence and objectivity within work provided by our Auditor is overseen by the Committee. They include an the context of applicable regulatory by the Committee in order to safeguard annual submission on their regulatory requirements and professional the objectivity and independence of the performance and obligations standards. Deloitte contributes a further Auditor. Prior to approval, consideration known as the Annual Performance independent perspective on certain is given to whether it is in the interests Report, together with a Compliance aspects of the Company’s financial of the Company that the services are Statement and a statement to underpin control systems arising from its work, purchased from Deloitte rather than the customer charges made by and reports both to the Board and the another supplier. Where Deloitte has each subsidiary. Audit Committee. been chosen, this is as a result of their In November 2018, the Committee Following a formal tender process in detailed knowledge of our business and reviewed the statement of risks, 2015/16, Deloitte LLP was reappointed understanding of our industry as well strengths and weaknesses and as External Auditor at the 2016 AGM. as demonstrating that they have the draft assurance plans for Severn The senior statutory Auditor, Kari necessary expertise and capability to Trent Water and Hafren Dyfrdwy, Hale, has overseen the audit of the undertake the work cost-effectively. which is a requirement of Ofwat’s Severn Trent Group since 2015/16. The policy was revised in early 2016, Company Monitoring Framework. Further information on Kari’s experience ahead of new EU regulations coming These documents set out the process, can be found on the Deloitte website. into force in June 2016, to provide that timeline and assurance framework The Company intends to put the External non-audit fees and independence of our in place for information published for Audit out to tender at least as often as Auditor would continue to be subject customers and other stakeholders, is required by applicable law, rules, to ongoing review in light of those including the Annual Performance regulations and best practice in line with rules. The current policy, which was Report. For each of Severn Trent Water the Competition and Markets Authority reviewed by the Committee during the and Hafren Dyfrdwy, Deloitte provides an and EU requirements for mandatory year, continues to comply with the EU audit opinion on the regulatory financial tendering and rotation of the audit regulations and requires approval by the reporting and price control segmentation firm. Under current regulations the Committee or its Chairman if a non- sections of the respective Annual External Audit must be put out to tender audit service provided by the Auditor is Performance Reports. by 2025 and Deloitte will not be able to expected to cost more than £100,000. participate. The Company has complied The policy also prohibits aggregate fees with the provisions of the CMA Audit from non-audit services in excess of 70% Order during the financial year. of the audit fee for the year.

90 Severn Trent Plc Annual Report and Accounts 2019 Strategic report > Governance Group financial statements Company financial statements Other information

The respective Annual Performance The Committee receives half-yearly The Board confirms that procedures Reports also provide an overall picture reports from the Head of Risk detailing providing an ongoing process for of performance, covering many aspects the significant risks and uncertainties identifying, evaluating and managing which are not financial including faced by the Group, an assessment of the principal risks and uncertainties performance against commitments and the effectiveness of controls over each of faced by the Group have been in place ODIs for each of Severn Trent Water and those risks and an action plan to improve for the year to 31 March 2019 and up Hafren Dyfrdwy. Both Severn Trent Water controls where this has been assessed to the date of this report, which is in and Hafren Dyfrdwy appoint independent as necessary. accordance with the Code and Guidance engineering consultants, to report and on Risk Management, Internal Control To further enhance the clarity of provide assurance on those aspects. and Related Financial and Business reporting and insight that can be The Committee receives reports from Reporting September 2014. A risk gained from this ERM information ‘risk Jacobs and Deloitte on their work for identification and horizon scanning flightpaths’ are now reported to the Severn Trent Water, and Black & Veatch, update was provided to the Board Audit Committee. Jacobs and Deloitte for Hafren Dyfrdwy, in March 2019. The Board also gave as part of its review of the respective These demonstrate the level of risk the consideration to emerging risks, with Annual Performance Reports. Group faces and the timeline for the key specific attention being given to those risk mitigation steps to manage the risk emerging risks considered to be of Risk management to the target position. The flightpaths ongoing importance to the Group and The Audit Committee reviews the help to facilitate a more thorough review its stakeholders. Further details on processes for, and outputs from, the of the target risk positions, consider risk emerging risks can be found on page 55 Group’s ERM process, through which appetite and assess whether actions are of the Strategic report. our principal risks and related controls on target, with the correct prioritisation In its review of risk management during are identified. The Committee also in place. reviews the effectiveness of the risk the year, the Board explicitly considered management system on behalf of the the target position for significant risks Board and keeps under review ways and whether target risk positions are in which to enhance the control and appropriate. It also confirmed that assurance arrangements. suitable timescales had been agreed for reaching them. Further detail on the ERM process can be found in the Strategic report on page 54.

Non-Audit Fees 2018/19 Nature of service Reason for Deloitte’s appointment Fees (£’000) Audit related assurance services Interim review This work is akin to an audit and is expected to be performed 54 by the External Auditor. The same safeguards that apply to the External Audit also apply to this work. Assurance of regulatory returns Audit of sections 1 and 2 of the Hafren Dyfrdwy and Severn Trent 66 Water Annual Performance Reports is closely related to the External Auditor’s statutory audit work and the two assignments are performed in parallel. Reporting under Group financing documents These documents require reports and it is normal practice for the 32 Auditor to provide these. Subtotal 152 Other assurance services Assurance in connection with PR19 Business Plan Agreed-upon procedures relating to financial data tables submitted to 27 submission Ofwat as part of the PR19 process for Severn Trent Water and Hafren Dyfrdwy. Other assurance 4 Subtotal 31 Total 2018/19 non-audit fees 183

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Risk management governance process The Group’s risk management governance process is based on the three lines of assurance model and is scrutinised by the Audit Committee, through delegated authority from the Severn Trent Plc Board.

Policy oversight GAA | Doing the Right Thing | Group policies

Risk tolerance Risk appetite BOARD Report Delegated authority ERM reports Internal Audit AUDIT COMMITTEE Whistleblowing Bribery and fraud

Third line of assurance – Internal Audit Independent review and oversight by Internal Audit, which independently evaluates the adequacy and effectiveness of the Group’s risk management control and governance processes.

Second line of assurance – management/ERM team Inform Business units are monitored by management and the Inform and ERM team which monitors, and provides assurance, on compliance and improve with Group policies and procedures. The ERM team reports to the prioritise Audit Committee and Board on the ERM process, principal risks and related controls.

First line of assurance – line management/risk champions Line management accountability for compliance with Group policies, Doing the Right Thing and GAA. Risk champions within each business unit identify, collate and report risk data to the ERM team.

OVERSIGHT

92 Severn Trent Plc Annual Report and Accounts 2019 Strategic report > Governance Group financial statements Company financial statements Treasury Committee report Other information Accountability

Dear Shareholder • oversight of interest rate and inflation risk management strategies, in Chairman’s I am pleased to introduce this report particular, the monitoring of the impact which details the role of the Treasury of changes in forecast interest rates Committee and the important work it has and inflation on Group earnings; message undertaken during the year. • oversight of the Group’s The Committee continues to play a funding strategy; key role in supporting the Board in monitoring performance against the • monitoring the Group’s exposure to Group’s approved Treasury Policy and financial institution credit risk; annual Treasury Plan, reviewing in detail • monitoring the Group’s exposure to the Group’s funding requirements and foreign currency risk; providing oversight of the Group’s key financing risks and opportunities. • monitoring the Group’s exposure to financial liquidity risk; The Committee has undertaken reviews of the Treasury Policy Statement and • oversight of energy exposure risk energy risk management strategy and management strategies; agreed changes where required. It has • receiving updates on general financial also maintained its focus on the Group’s market movements; John Coghlan credit ratings and key financial ratios, in Chairman of the Treasury Committee full consideration of the PR19 Business • oversight of treasury internal controls; Plan submission this year. and Attendance table The Committee held five meetings during • oversight of the Group’s pension the year and has met once since the end schemes’ investment strategy. Committee Meetings Max Member attended possible of the financial year. There have also Key areas of focus in 2018/19 John Coghlan 5 5 been three additional meetings held throughout the year. I would like to thank Philip Remnant 5 5 The Committee provides Board oversight the members of the Committee, the of the Group’s key financing risks James Bowling 5 5 management team and the Committee’s and opportunities. independent advisers, Evercore, for their continued commitment and Some key areas of discussion for the The members of the Committee the importance they all attach to the Committee during 2018/19 included: in 2018/19 are shown above. Committee’s work. • the impact of prevailing economic The Group Treasurer is also a member conditions on the forecast of long- of the Committee, but not a member of The Committee’s performance was term interest rates and associated the Board. assessed as part of the annual Board Effectiveness evaluation. I am pleased interest rate and inflation risk Only members of the Committee have that the Committee is regarded as management policy; the right to attend Committee meetings. operating effectively and the Board takes • the impact of Brexit on existing and In addition to the attendance set out assurance from the quality of its work. future sources of funding for the above, Andrew Duff, Kevin Beeston, the Group’s businesses; Group Commercial Director and the The Committee has spent a significant Group Financial Controller normally proportion of its time overseeing • the AMP7 financing strategy; attend, by invitation, all meetings of the development of Severn Trent • the AMP7 energy procurement the Committee. Other individuals may Water’s PR19 financing strategy. strategy; and be invited to attend meetings as and Following Severn Trent’s selection as a when appropriate. fast-track company, the Committee has • the review of the Group’s European continued its focus on ensuring that we Medium Term Note Programme The Committee’s Terms of Reference were enter AMP7 in a strong funding position and approval for bonds to be issued updated in March 2019. that takes account of changes to the pursuant to that Programme during regulatory allowance and fully considers the year. financing risks and opportunities. John Coghlan Treasury Committee Chairman of the Treasury Committee Responsibilities

The responsibilities of the Committee are Documents available at severntrent.com explained below: Treasury Committee Terms of Reference • oversight of treasury activities in implementing approved treasury policies;

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Corporate Responsibility Committee report Accountability

Dear Shareholder These include expanding the scope of our biodiversity agenda beyond Severn Chair’s As Chair of the Corporate Responsibility Trent sites and providing a focus on flood Committee, I am pleased to introduce protection, recreational facilities and this report which details the work improved water quality. This biodiversity message undertaken by the Committee during agenda complements the Government’s the year as well as the role it plays in 25 Year Environment Plan and it is developing the Group’s societal purpose. strongly supported by our stakeholders. You can read more about our social The Committee also discussed the purpose on page 6. The following account approach to carbon and climate change, provides detail on the activities of the including our triple pledge to become Committee, an overview of the topics carbon neutral by 2030, have 100% discussed and steps taken to address electric vehicles by 2030 (as long as the any actions. vehicles are available) and generate I’m very pleased to report that we’ve 100% renewable energy by 2030. had a particularly strong year on This pledge is even more ambitious than improving biodiversity, Catchment a science-based target and builds on our Management, education, for example long track record of making year-on-year through our Wonderful Water Tour, reductions in emissions. helping customers who are in genuine Dame Angela Strank Other matters we have focused on this need to pay their bills and our continued year include employee volunteering and Chair of the Corporate commitment to renewables through our Responsibility Committee responsible supply chain management. acquisition of Agrivert. Additional information on these The Committee plays a key role in matters can be found on pages 44 and Attendance table supporting the Board within the 45 respectively. Committee Meetings Max Governance Framework, by providing Towards the end of the year, the Member attended possible guidance and direction to the Committee reviewed our community Dame Angela 4 4 Company’s Corporate Responsibility dividend approach. This is a new Strank (Chair) and Sustainability Programme. commitment to invest 1% of our profits Andrew Duff 4 4 The Committee also provides oversight in community projects, providing a really Dominique 4 4 of the Group’s key non-financial risks exciting opportunity to make positive Reiniche and opportunities. impact in our region. The first grants will Liv Garfield 4 4 The Committee reviewed the Group’s be made available in 2021. performance across a range of I should like to thank the members corporate responsibility commitments of the Corporate Responsibility and reviewed regular whistleblowing In addition to the attendance set out Committee for the open, constructive reports. We also reviewed our approach above, the Company Secretary and Head and progressive discussions that take to modern slavery, and were pleased of Corporate Responsibility normally place at our meetings and their personal that our 2018 Modern Slavery Statement attend, by invitation, all meetings of commitment to our wide ranging and ranked 16th in the Business and Human the Committee. Other members of senior impactful agenda. Rights Resource Centre’s review of management are also invited to attend FTSE100 companies. Dame Angela Strank as appropriate. The Committee also discussed Chair of the Corporate The Committee’s Terms of Reference were evolving reputational risks and how Responsibility Committee updated in March 2019. these are being managed, including renationalisation and climate change. Further information on our Group risks Documents available at severntrent.com can be found on pages 56 – 61. Corporate Responsibility Committee Terms of Reference The Committee spent a significant Modern Slavery Statement proportion of its time focusing on Severn Group Environment Policy Trent’s role as an environmental leader, reviewing aspirations, commitments and performance to date. As part of this work, the Committee reviewed our approach to biodiversity including new more ambitious targets for AMP7.

94 Severn Trent Plc Annual Report and Accounts 2019 Strategic report > Governance Group financial statements Company financial statements Other information

Our Corporate Responsibility Performance against the Framework ‘Doing the Right Thing – The Framework is regularly reported to the Committee, Severn Trent Way’ and in our Annual Report and Accounts, Our Corporate Responsibility Framework on our website and through selected At the heart of Severn Trent’s culture (the ‘Framework’) is ambitious, broad environmental, social and governance is a closely held set of values called ranging and underpinned by stretching (‘ESG’) indices. You can read more on ‘Doing the Right Thing’. These values targets, to ensure we are delivering page 29. embody the principles by which the the commitments expected of a leading Group operates and they provide a socially and environmentally responsible Employee rewards are directly linked consistent framework for responsible business. Acting in a responsible manner to our Corporate Responsibility business practices. is integral to our purpose of serving our performance, with customer ODIs, ‘Doing the Right Thing’ is supported by communities and customers, building health and safety and our key a number of policies which guide our a lasting water legacy and achieving metrics contributing to employee workforce and suppliers. These policies our vision to be the most trusted water bonus. We believe that by focusing codify how to identify and deal with company by 2020. We hold ourselves on the issues most important to our suspected wrongdoing, fraud or to account against our Framework customers, our Framework has the malpractice; how to maintain the highest and agreed metrics through an right focus. In 2019/20, our aspirations standards of safety; and how to apply effective performance management and commitments will be reviewed in good ethics and sound judgment. system. Our Corporate Responsibility line with our new PR19 plan and our performance is embedded within the commitments for the next five years. organisation, with ODIs linked to the majority of our metrics, enabling the Company to focus on issues important to our customers.

Key areas of Corporate Responsibility Committee focus in 2018/19 A summary of the matters considered at each meeting is set out below: April 2018 • Corporate Responsibility performance report • Community Champions – Our Employee Volunteering programme • Internal Audit Plan 2018/19 • Anti-Slavery and Human Trafficking Statement 2018 – Update • 2018/19 Annual Report – Approach • Committee Terms of Reference: Annual Review • Whistleblowing report July 2018 • Reducing Our Carbon Footprint • Improving the Biodiversity of Our Region • Anti-Slavery and Human Trafficking Statement 2018 • Internal Audit Open Actions in Relation to Corporate Social Responsibility • Whistleblowing report November 2018 • Corporate Responsibility performance report • Engaging Responsibly with Our Supply Chain • Political Risks • Realising Our Vision for Environmental Leadership • Whistleblowing report March 2019 • Corporate Responsibility performance report • Climate Change Mitigation and Adaptation Strategy • Zero Carbon Strategy • Modern Slavery Update 2019 • Establishing our Community Dividend • Whistleblowing report

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Corporate Responsibility Committee report continued Accountability

Our Code of Conduct is embedded We will always treat people in our Freedom of Association and throughout Severn Trent and forms business and supply chain fairly and Collective Bargaining a key part of our Company induction have a clear zero tolerance approach to and all employees are required to modern slavery. To date we have had no We recognise the right of all employees complete an e-learning training instances of modern slavery raised, but to Freedom of Association and Collective module to ensure they understand their we are not at all complacent and are fully Bargaining. We seek to promote personal responsibilities. committed to protect against modern co-operation between employees, our slavery in our business and supply chain. management team and recognised Trade Human Rights and Our understanding is constantly evolving Unions. We meet with our Trade Unions Modern Slavery and we are continually adapting and on a quarterly basis at the Employee improving our approach accordingly. Forum and see mutual benefit in sharing We are committed to protecting the We know modern slavery is a growing information with our colleagues and human rights of our employees and global issue and know our customers seek their feedback and suggestions. contractors as we have clearly set and stakeholders share our concern. We believe this fosters a common out in our Code of Conduct, ‘Doing the Our highest risk is through our supply understanding of business needs and Right Thing’. We have a responsibility chain. Therefore we work with our helps to deliver joint solutions aimed to understand our potential impact on suppliers to ensure they operate to the at making our business successful. human rights and to mitigate or eliminate same standards we set ourselves, and Our Employee Forum also provides an any potentially negative impacts. we have also been working closely with invaluable opportunity for engagement Whilst not having a specific human our suppliers to ensure they understand with the whole workforce to ensure rights policy, we have Group policies on the risks involved in their own supply workforce views are taken into account. Human Resources, Anti-Bribery and chains. All suppliers are required to Anti-Fraud, Whistleblowing (‘Speak Up’) sign up and operate in line with our Whistleblowing and Procurement. Code of Conduct, which clearly states Our employees, and wider workforce, zero tolerance, and this is built into our can raise concerns at work through procurement tender process. their line manager, senior management We have been working with Hope for and through our confidential and Justice for three years to develop our independent whistleblowing helpline, approach. Our full Anti-Slavery and ‘Safecall’. All investigations are carried Human Trafficking Statement can be out independently and the findings are found on the Severn Trent Plc website. reported directly through to the Audit and Corporate Responsibility Committees. Prevention and detection of bribery and corruption Our Group financial crime policy prohibits bribery, corruption and fraud in all our business dealings, regardless Dame Angela Strank met employees at our Minworth site, observing first hand their of the country or culture within which we contribution to our renewable energy commitment. work. This year we have also updated our policy to take into account the new tax evasion offences. Employees identified as high risk, through a risk review for all Group employees, are required to undertake an online training module and test to ensure awareness of, and compliance with, anti-bribery and corruption. Responsible business practices are an integral part of our business strategy. Performance against our Corporate Responsibility commitments are reported throughout our Annual Report and Accounts reflecting their embedded nature. You can read more on page 29 and on our dedicated ESG webpage, on the Severn Trent website.

96 Severn Trent Plc Annual Report and Accounts 2019 Strategic report > Governance Group financial statements Company financial statements Directors’ remuneration report Other information Remuneration

Dear Shareholder Remuneration for the year Chairman’s As a Committee, the last year has been under review spent building on the foundations of a We received overwhelming shareholder well-received Remuneration Policy (‘the support and approval of the Policy at letter Policy’) and ensuring that our strong and last year’s AGM, and a summary of well-respected approach to governance the voting is shown in the table below. also reflects the latest changes in the This is, I believe, testament to how we 2018 UK Corporate Governance Code align our remuneration decisions with (‘the 2018 Code’). our business strategy, as well as the We have seen a number of decisions extensive shareholder consultation made by management to support and engagement process undertaken preparations for the next Asset beforehand. The full Policy can be Management Plan (‘AMP’) and a found on the Severn Trent Plc website continued desire to invest responsibly and on pages 120 to 128 in the 2018 for sustainable growth. This has been Remuneration Committee report. combined with successfully navigating Through our At a Glance section, on page operational challenges, including the 100 we summarise the performance prolonged hot, dry summer, as well outcomes against our remuneration as achieving fast-track status for our framework, in the context of how the Philip Remnant Severn Trent Water PR19 submission. Policy was applied in 2018/19. Chairman of the Remuneration Committee The Committee is cognisant of The annual bonus will pay out at 70.2% of developments in governance salary for both the CEO and the CFO. Attendance table expectations and our responsibilities relating to disclosure and transparency The 2016-2019 Long Term Incentive Plan Attendance (‘LTIP’) has vested at 100%, driven by Committee Member in 2018/19 of all aspects of executive pay and the strong cumulative performance of Philip Remnant 4/4 alignment of reward throughout the workforce. With this in mind, the our Return on Regulated Equity (‘RoRE’) (Chairman) over the three year performance period. Andrew Duff 4/4 Committee recognises the contribution made by all employees to put customers’ The component parts of RoRE are Kevin Beeston 4/4 customer Outcome Delivery Incentives Dame Angela Strank 4/4 needs at the heart of our business throughout the year in delivering an (‘ODIs’), financing and Totex (total capital essential public service. and operational expenditure). The Committee believes that the Contents Page Further comment on our overall performance during the financial year outcomes of the bonus and LTIP Chairman’s letter 97 can be found in the CEO’s review on accurately reflect the performance of the At a Glance 100 page 21. Company over this period. No discretion Summary of Remuneration 104 has been exercised by the Committee Policy and Implementation The Committee has met four times in respect of either the 2016 LTIP or the Employment at Severn Trent 108 during the year and twice since the end of 2018/19 Annual Bonus. Annual Report on 117 the financial year. Remuneration

The Committee’s Terms of Reference, were updated in March 2019 and are available on the Severn Trent website, alongside the Remuneration Policy which 2018 AGM Shareholder voting was approved at the Annual General Votes Votes Votes Meeting (‘AGM’) on 18 July 2018. Resolution for against withheld Approve Remuneration Policy 165,243,866 1,369,398 266,854 All Committee members are independent (99.18%) (0.82%) Non-Executive Directors, as defined Approve Directors’ remuneration report 165,511,103 1,100,476 273,463 under the 2016 UK Corporate Governance Code (‘the Code’), with the exception of the (99.34%) (0.66%) Company Chairman who was independent on his appointment. Full biographies of the Committee members can be found on pages 66 to 67. The Committee members have no personal financial interest, other than as shareholders, in the matters considered by the Committee.

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Directors’ remuneration report continued Remuneration

Employment at Severn Trent • We are changing the weighting of Our approach has increased focus existing elements within our Annual on customers, asset health and the The Chairman and CEO regularly Bonus Scheme. Whilst the focus of environment. We are committed to attend the Employee Forum, and in the bonus will remain combined ODI building a resilient future over the longer the coming year I and the other Non- and PBIT performance, the changes term, and believe that by making these Executive Directors will also attend. will drive an even stronger operational adjustments to our bonus scheme we are The Committee will continue to use culture within Severn Trent, as we strengthening the alignment between the voice of the employee as valuable transfer smoothly into the new AMP. reward outcomes and strategic priorities insight when making wider remuneration for both the coming financial year and the • We continue to apply a consistent decisions. Our all-employee Annual years ahead. The changes will: Bonus Scheme ensures alignment of bonus scheme design throughout reward throughout the organisation, the organisation, from the front line • Increase the proportion of bonus and rewards delivery of our customer to Executive Directors, ensuring attributed to Customer and priorities now and in the future. that every employee is incentivised Environment ODIs from 28% to 35%; and rewarded to deliver the same • Create three sub-categories within the We are extremely proud to have shared objectives. been recognised as the first socially Customer and Environment element purposeful company in the utility We are cognisant of the requirements of the bonus, which all directly relate sector, and the section on page 111 of the 2018 Code, and our approach to to the delivery of a resilient service for highlights our evolving diversity and future reporting is set out on page 114. our customers: We will continue to evolve our disclosure inclusion policies and accomplishments; –– Customer Outcomes (15%); in particular, our top four position in on executive pay taking into account the 2018 Hampton-Alexander Review, best practice. –– Asset Health (10%); and and also our focus on Social Mobility, The At a Glance section on page 100 –– Environment and Social Outcomes recognised in the Social Mobility outlines how the Committee intends to (10%); Employer Index 2018 detailed on page implement the Policy in 2019/20. 113. More detail on our Social Purpose • Retain the element of the bonus around can be found on page 6. Ongoing Shareholder customer complaints and its weighting communication of 8% but align measurement with Remuneration in the year ahead Ofwat’s proposed new approach In line with our commitment to (known as ‘C-Mex’ – Customer Service We remain committed to delivering a maintaining a credible and transparent Measure of Experience); leading and transparent remuneration remuneration framework, in April framework, supported by strong • Reduce the proportion of bonus linked 2019 we contacted our 30 largest governance processes, designed to PBIT from 57% to 49%; shareholders representing over 50% to drive the right behaviours across of our issued share capital, as well as • Remove the bonus reward linked to the whole organisation and deliver Glass Lewis, The Investment Association the delivery of personal objectives, long-term success, meeting the needs and ISS, to inform them of proposed previously 7%. The Committee believes of our customers, shareholders and changes to the operation of our annual that the individual contributions of communities we serve. bonus for the 2019/20 financial year. the members of the Executive will be As a Committee, we recognise the These are all within the remit of the reflected in the outcomes for the other importance of taking into consideration current Policy. bonus measures; and the relationship between operational The Board is confident that the Company • Retain the proportion of bonus linked performance and relative remuneration, is making strong progress against to Health and Safety at 8%. when designing our LTIP and Annual its priorities and delivering value for Bonus Scheme, and we believe that there The feedback and responses received on all our stakeholders (shareholders, are three areas which set us apart: the proposed changes were positive and customers and colleagues). The focus supportive overall of the Committee’s • Our LTIP will continue to be based on for the remainder of AMP6 is to deliver approach, which also has the strong upper quartile (‘UQ’) stretch RoRE the very best service to our customers support of Ofwat. performance. This means, to be fully and build a resilient future to protect rewarded, management must deliver our services and the environment going Committee performance one of the best service and cost into AMP7. A number of objectives drive performances compared with other this strategic focus and achieving these The Committee’s performance was companies in the sector, aligning objectives will ensure that we continue to assessed as part of the annual Board reward with the interests of both deliver long-term, sustainable value for evaluation. I am pleased to report investors and customers. all our stakeholders. As the Company’s that the Committee is regarded as strategic priorities evolve, the Committee operating effectively and the Board firmly believes that the operation of the takes assurance from the quality of the bonus must evolve with it. Committee’s work. Philip Remnant Chairman of the Remuneration Committee

98 Severn Trent Plc Annual Report and Accounts 2019 Strategic report > Governance Group financial statements Company financial statements Other information

Key areas of Remuneration Committee focus in 2018/19 A summary of the matters considered at each meeting is set out below: May 2018 Annual bonus outcome for 2017/18 2015 LTIP vesting Salary increases for Executive Committee members and for Executive Directors Annual bonus 2018/19 targets LTIP awards for 2018 Final draft of Directors’ remuneration report for 2017/18 Review of AGM season Update on Remuneration Policy consultation November 2018 Reward and performance alignment 2017/18 compared with Water and Sewerage Companies (‘WaSC’) peers Update on market practice and remuneration forward look UK Corporate Governance Code update Gender pay reporting 2018 Annual bonus 2018/19 – interim update LTIP award – application of RoRE methodology LTIP leavers Annual bonus 2019/20 – design January 2019 Executive Committee members and Executive Directors’ benchmarking review Review of expense claims procedure for Chairman and CEO LTIP awards for 2019 Annual bonus 2019/20 – structure and targets Directors’ remuneration report planning for 2018/19 Review of mandatory shareholding requirements and update on sourcing for share schemes March 2019 Executive Committee members and Executive Directors’ salary increase proposals Terms of reference for the Remuneration Committee Annual bonus 2018/19 – interim update LTIP awards for 2019 UK Corporate Governance Code update LTIP leavers Review of fees for the Company Chairman

Who supports the Committee? PwC is one of the founding members of the Remuneration Consultants Group To ensure that the Company’s Code of Conduct and adheres to this remuneration practices are in line Code in its dealings with the Committee. with best practice, the Committee The Committee reviews the appointment has appointed independent of its advisers annually and is satisfied external remuneration advisers, that the advice it receives is objective PricewaterhouseCoopers LLP (‘PwC’). and independent. This appointment in 2017 followed a selection process. PwC attends meetings Fees for advice provided by PwC of the Committee by invitation. The CEO, to the Committee during the year Director of Human Resources and, by were £143,000 excluding VAT invitation, the Head of HR Operations (2017/18: £170,500). Separate teams and Reward & Pensions Manager also within PwC also provided unrelated attended the Committee meetings to tax consulting, pensions, and other provide advice and respond to specific assurance and advisory services during questions. Such attendances specifically the year. excluded any matter concerning their own remuneration. The Company Secretary acts as secretary to the Committee.

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Directors’ remuneration report continued Remuneration

At a Glance Strategic alignment of remuneration The following section sets out our The Committee believes it is important that, for Executive Directors and senior remuneration framework, a summary management, a significant proportion of the remuneration package should be of how the Policy was applied in performance-related, and that performance conditions applying to incentive 2018/19 in the context of our business arrangements support the delivery of the Company’s strategy through our five performance, and from page 104 strategic priorities. The following table sets out how each of these is reflected in the details how the Committee intends to Annual Bonus Scheme and LTIP for 2018/19, and it will be updated next year to reflect implement the Policy in 2019/20. the 2019/20 Annual Bonus Scheme.

Strategy and its link to performance based pay

Embed customers Driving operational Investing Changing the Creating an at the heart of excellence and responsibly for market for awesome place what we do continuous sustainable the better to work innovation growth

How do we measure progress against our objectives?

• Internal • Improvements to • Delivering our • Clear PR19 plan • Lost time incidents sewer flooding river water quality capital programme • Compelling case per 100,000 • External • Number of Category • Building for investment hours worked sewer flooding 3 pollution incidents a sustainable • Bioresources • Minutes • Successful business change programme without supply catchment • Be the sector’s • Water quality management thought leader complaints schemes • Create a strong Welsh entity

How are our strategic objectives linked to our incentive plan?

Annual Bonus Scheme

Customer ODIs (20%) Customer ODIs (20%) RWWW PBIT (47%) Customer ODIs (20%) Health and Safety (8%) Customer Personal Objectives Business Services Personal Objectives Complaints (8%) (7%) PBIT (10%) (7%)

LTIP

RoRE * (100%) RoRE* (100%) RoRE* (100%) RoRE* (100%)

* Components of RoRE are: Wholesale Totex Retail operating costs ODIs Financing

100 Severn Trent Plc Annual Report and Accounts 2019 Strategic report > Governance Group financial statements Company financial statements Other information

2018/19 Single figure outcomes The graphs show how the successful delivery of our strategy has flowed through to the rewards provided to our Executive Directors. The full explanatory notes for each element of remuneration are detailed on page 117 in the Annual Report on Remuneration.

2018/19 Single figure outcomes £’000 CEO (Liv Garfield) CFO (James Bowling) 3,852 4,000

3,000 2,395 2,199 2,194 2,009

2,000 1,253 897 1,198 1,158

1,000 547

0 Minimum On-target Maximum Single figure Single figure Minimum On-target Maximum Single figure Single figure 2018/19 2017/18 2018/19 2017/18 Salary Pension Benefits Annual Bonus LTIP Share price growth • Minimum pay is fixed pay only (i.e. salary + benefits + pension). • On-target pay includes fixed pay, 50% of the maximum bonus (equal to 60% of salary for both the CEO and the CFO) and 50% vesting of the LTIP awards (with grant levels of 200% of salary for the CEO and 150% of salary for the CFO), and illustrating 25% increase in share price on LTIP shares over the vesting period. • Maximum pay includes fixed pay and assumes 100% vesting of both the annual bonus and the LTIP awards, and illustrating 50% share price increase on LTIP shares over the vesting period. • All amounts have been rounded to the nearest £1,000. Salary levels (which are the base on which other elements of the package are calculated) are based on the salary paid during the year ended 31 March 2019. The value of taxable benefits is the cost of providing those benefits in the year ended 31 March 2019. The Executive Directors are also permitted to participate in the all-employees Sharesave scheme, on the same terms as other eligible employees, but they have been excluded from the above graph for simplicity.

Annual bonus 2018/19 outturn Further details, including information on the performance assessment of personal objectives are set out on pages 118 and 119 in the Annual Report on Remuneration.

Threshold Target Maximum Outcome (0% payable) (50% payable) (100% payable) Weighting achieved RWWW £515.1m £528.1m £541.1m 47% 21.5% PBIT(i) Actual £527.0m Customer £40m £60m £80m 20% 20% ODIs(ii) Actual £91.1m Business £58.8m £60.8m £62.8m 10% 10% Services PBIT(iii) Actual £67.4m Health and 0.17 0.13 0.09 8% 0% safety(iv) Actual 0.30 Customer 5% 10% 15% 8% 0% complaints(v) Actual –14% Personal 7% 7% – CEO performance 7% – CFO

(i) Underlying profit as defined in note 45 to the Group financial statements. (ii) Customer ODIs quoted pre-tax in 2012/13 prices and pre the regulatory customer ODI cap. (iii) Underlying PBIT adjusted to remove £3.3 million impact of IFRS 15. (iv) Measured as number of lost time incidents divided by number of hours worked multiplied by 100,000. (v) Measured as the percentage reduction in written complaints.

2018/19 Value of shares salary* Bonus opp Bonus outcome Annual Bonus Cash bonus awarded (£) (% salary) (% max) (£) (£) (£) CEO 708.0 120 58.5 497.0 248.5 248.5 CFO 426.6 120 58.5 299.5 149.8 149.7

* Bonus calculated using salary at 31 March 2019.

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Directors’ remuneration report continued Remuneration

2016 LTIP vesting in 2018/19 2016 LTIP vesting in 2018/19 The chart shows the outcome of the 2016 CEO CFO LTIP awards, for which the performance Maximum outcome outcome period ended on 31 March 2019. The LTIP Threshold FD (100% (vesting as (vesting as which is based on RoRE over the three (25% payable) payable) % of award) % of award) years to 31 March 2019 will vest in RoRE – measured 1x 1.39x 100% 100% against multiple June 2019. Actual 1.76x of Ofwat FD Further information is provided on page 120 in the Annual Report on Value attributable Value of Remuneration, including a breakdown Number Award Face value to share dividend Value of of the LTIP awards granted to Executive of shares vesting of shares price equivalents resultant (i) (ii) Directors in 2018. granted (% max) vesting movement due award CEO 46,115 100% 913.2 £0 £88.5 £1,001.7 CFO 18,529 100% 366.9 £0 £35.6 £402.5 (i) Based on 3 month average share price as at 31 March 2019 of £19.80. (ii) Based on dividends paid in the period since date of grant to 31 March 2019.

Business performance – Business performance – 2018/19 outturns against KPIs 2018/19 outturns against Key Performance Indicators (‘KPIs’) ODI £m(i) (ii) (iii) The charts show our customer ODI and 100 RoRE performance since the beginning of the current AMP. This strong sustained 71.6 level of performance when compared to our Final Determination has informed the level of reward received by our 47.4 Executive Directors and our employees 50 through the Company-wide bonus scheme, which is linked to the same 23.2 performance measures.

(4.5) 0 2015/16 2016/17 2017/18 2018/19 Severn Trent

(i) 2017/18 figure restated to reflect Ofwat’s decision on supply interruptions in their Final Determination of in-period ODIs for 2018. (ii) Customer ODIs quoted pre-tax in 2012/13 prices. (iii) 2018/19 figure is post the regulatory customer ODI cap. Pre cap the net reward was £91.9 million as shown in the annual bonus 2018/19 outturn on page 101.

RoRE %(i) (ii) 15%

10.8% 11.1% 10.2%

10% 9.0% 8.1%

6.3% 6.6%

0% 2015/16 2016/17 2017/18 2018/19

Severn Trent UQ of WaSC’s (i) 2017/18 figure restated to reflect Ofwat’s decision on supply interruptions in their Final Determination of in-period ODIs for 2018. (ii) Calculated in accordance with Ofwat methodology. UQ data is not yet available for the current year.

102 Severn Trent Plc Annual Report and Accounts 2019 Strategic report > Governance Group financial statements Company financial statements Other information

Executive Director shareholdings Executive Director shareholdings The CEO and CFO have exceeded the % of base salary shareholding requirements applicable in 1,000 322% 2018/19 of 300% and 200% respectively of salary. 800 Shareholding requirement 600 132% The minimum shareholding requirement 443% 231% for Executive Directors, and the 443% 400 300% current share interests of the Executive Directors, take into account shares which 200% 207% 96% are owned outright or vested, shares 200 207% which are unvested and shares which are subject to performance, and are set out 0 CEO CFO opposite. The shareholding requirement Shareholding requirement Shares counting towards shareholding requirement(i) must be built up over a five year period Unvested subject to continued employment(ii) Unvested subject to performance(iii) and then subsequently maintained. Further detail regarding the Executive (i) Represents beneficially owned shares as well as shares held in trust as part of the annual bonus Directors’ outstanding shares awards deferred share awards (of which 50% are deducted to cover statutory deductions). can be found on page 120. (ii) Represents 2016 LTIP shares which are subject to an ongoing vesting period plus shares held as part of the Sharesave scheme. Shares counting towards the (iii) Represents the 2017 and 2018 LTIP awards which are subject to ongoing performance. achievement of the guideline include beneficially owned shares (including All calculations in the above chart use a closing share price on 31 March 2019 of £19.76. shares held by connected persons) and the net of tax value of deferred shares under the annual bonus since they are not subject to performance conditions. The Executive Directors are expected to retain all shares received through the vesting of any incentive schemes (after the settlement of any tax liability) until the shareholding requirements are met.

Overall link to remuneration and equity of the Executive Directors Overall link to remuneration and equity of the Executive Directors 2018/19 Value of Value of As a Committee, we want to incentivise Single Shares held Shares held shares at shares at Figure at start of at end of start of year end of year Difference Executive Directors to take a long-term, (£’000s) year year (£’000s)(i) (£’000s)(ii) (£’000s) sustainable view of the performance of CEO 2,395.4 103,274 137,349 £1,904.4 £2,714.0 +£809.6 the Company. This is why, when we look at the remuneration paid in the year, we CFO 1,253.0 23,464 32,075 £432.7 £633.8 +£201.1 also look at the total equity they hold and (i) Based on a closing share price on 31 March 2018 of £18.44. its value based on the performance of the (ii) Based on a closing share price on 31 March 2019 of £19.76. Company. The table sets out the number of shares beneficially owned by the Executive Directors at the beginning and end of the financial year, and the impact on the value of these shares taking the opening and closing price for the year.

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Directors’ remuneration report continued Remuneration

Summary of the Policy and implementation in 2018/19 and 2019/20 The Company’s Policy remains to attract, The diagram below illustrates the retain and motivate its leaders and to balance of pay and time period ensure they are focused on delivering of each element of the Policy for business priorities within a framework Executive Directors. designed to promote the long-term success of Severn Trent, aligned with shareholder interests.

Total pay Year 1 Year 2 Year 3 Year 4 Year 5

Fixed pay Salary

Benefits, Fixed pay Pension

Annual Bonus 50% in shares 50% in cash 3-year deferral period (Malus and clawback provisions apply) No further performance conditions

LTIP Up to 200% salary 2-year holding period (Malus and clawback provisions apply) 3-year performance period No further performance conditions

104 Severn Trent Plc Annual Report and Accounts 2019 Strategic report > Governance Group financial statements Company financial statements Other information

The table below sets out an overview of the key areas of the Policy and summarises how the Committee applied the Policy in 2018/19, together with details of how the Committee intends to implement the Policy in 2019/20.

Base Salary To recruit and reward Executive Directors of a suitable calibre for the role and duties required. How we implemented How we plan to implement Operation Opportunity the Policy in 2018/19 the Policy in 2019/20 Salaries are normally reviewed Any increases will typically not be Executive Directors’ Executive Directors’ annually on 1 July. higher than the average increases salaries increased by 2.5% salaries increase by 2.4% Salaries take account of: for employees. from 1 July 2018. from 1 July 2019. – Individual performance; However, a higher increase may CEO – £708,000 CEO – £725,000 – Experience and contribution; be proposed in the event of a role CFO – £426,600 CFO – £436,900 change or promotion, or other – Developments in the relevant These rises were lower These rises are in line with the exceptional circumstances. employment market; than the general employee general employee salary increase. – Company performance salary increase. and affordability; – Wider economic environment; and – Internal relativities.

Benefits To provide competitive benefits in the market to enable the recruitment and retention of Executive Directors. How we implemented How we plan to implement Operation Opportunity the Policy in 2018/19 the Policy in 2019/20 Benefits typically include car The value of benefits is based Normal company No change. allowance, family level private on the cost to the Company and benefit provision. medical insurance, life assurance, there is no pre-determined personal accident insurance, maximum limit. The range and health screening, an incapacity value of the benefits offered are benefits scheme and other reviewed periodically. incidental benefits and expenses. In addition, Executive Directors are eligible to participate in all-employee share plans on the same terms as other eligible employees.

Pension To provide pension arrangements comparable with similar companies in the market to enable the recruitment and retention of Executive Directors. How we implemented How we plan to implement Operation Opportunity the Policy in 2018/19 the Policy in 2019/20 A defined contribution scheme For current Executive Directors, Executive Director current No change for current Executive and/or cash supplement in lieu the Company contribution pension arrangements for Directors. of pension. to a pension scheme and/or 2018/19 are as follows: cash allowance will be up to CEO – 25% of salary a maximum of 25% of salary. CFO – 25% of salary For any new recruit, the contribution will be up to a maximum of 15% of salary. This is in line with the level provided to the wider workforce.

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Directors’ remuneration report continued Remuneration

Annual bonus To encourage improved financial and operational performance and to align the interests of Executive Directors with shareholders through the partial deferral of payment in shares. How we implemented How we plan to implement Operation Opportunity the Policy in 2018/19 the Policy in 2019/20 Bonuses are based on financial, Maximum award of 120% Maximum opportunities: No change to the maximum operational and customer service. of salary. CEO – 120% of salary bonus opportunity or payment 50% of the bonus is paid in cash There will be no payment made CFO – 120% of salary mechanisms of bonuses. and 50% is deferred into shares for threshold performance. Performance measures See page 97 for the Chairman’s for three years (with the value of 50% of maximum will be paid (as a % of maximum): letter and description of changes any dividends to be rolled up and proposed to the operation of the for target performance and Regulated Water and paid on vesting). There are no annual bonus for financial year 100% of maximum will be paid Waste Water PBIT – 47% further performance targets on for stretch performance. 2019/20. Business Services the deferred amount. Performance measures PBIT – 10% The performance measures and (as a % of maximum): Customer ODIs – 20% targets for the annual bonus are Group PBIT – 49% Health & Safety – 8% selected annually to align with Resilient Service ODIs – 35%: the business strategy and the key Customer experience – 8% • Customer (15%) drivers of performance set under Personal objectives – 7% the regulatory framework. • Asset Health (10%) • Environment (10%) Malus and clawback Executive Directors awarded Customer Service – 8% provisions apply. bonuses of: Health & Safety – 8% CEO – 70.2% of salary CFO – 70.2% of salary Deferral of 50% of bonus earned. See page 101 for further details on outcomes.

LTIP To encourage strong and sustained improvements in financial performance, in line with the Company’s strategy and long-term shareholder returns. How we implemented How we plan to implement Operation Opportunity the Policy in 2018/19 the Policy in 2019/20 Awards are granted annually Maximum award opportunity Grant levels: No change to maximum and are subject to a three year up to 200% of salary. Up to CEO – 200% of salary LTIP opportunities or the performance period. 25% of an award may vest for CFO – 150% of salary performance conditions. threshold performance. RoRE is the sole performance The 2016 LTIP vested in the See page 107 for detail on condition, with a stretch target year at 100%. See page 120 LTIP awards to be granted. based on UQ performance. for further details. RoRE is calculated as profit See page 121 for details of the after tax (plus incentives RoRE target for the 2018 LTIP earned in the year) divided by awards granted in the year. the average equity proportion of our regulatory capital value, as prescribed by Ofwat. Awards made to Executive Directors are subject to a two year holding period post-vesting which continues to operate post‑cessation of employment. Malus and clawback provisions apply. The value of dividends paid on the shares comprising the award will be rolled up and paid on vesting.

106 Severn Trent Plc Annual Report and Accounts 2019 Strategic report > Governance Group financial statements Company financial statements Other information

Shareholding requirement To encourage strong alignment between the interests of shareholders and Executive Directors. How we implemented How we plan to implement Operation the Policy in 2018/19 the Policy in 2019/20 The CEO is expected to build and maintain a holding of shares to CEO – 300% of salary No change to requirements. the value of 300% of salary, and other Executive Directors 200% CFO – 200% of salary of salary. See pages 103 and 120 for Executive Directors are expected to retain all of the net of tax further details on shareholding number of shares they receive through the LTIP and deferred requirements and outstanding share bonus until the shareholding requirement has been met. share awards.

LTIP awards to be granted in 2019 The table below describes how the LTIP will be implemented in 2019. The CEO’s award will be 200% of salary and the CFO’s award will be 150% of salary. The RoRE performance condition that will be measured over three years, to 31 March 2022, and corresponding vesting (as % of salary) will be:

Award Threshold FD 1.39 x FD UQ RoRE performance relative to WaSCs 2019 LTIP % Salary % Salary % Salary CEO 37.5% 150% 200% Vesting for performance CFO 25% 100% 150%

Chairman and Non-Executive Directors’ fees (audited) Chairman and Non-Executive Directors’ fees (audited) Fees Fees From 1 April 2019, Non-Executive 2019/20 2018/19 Increase % Director fees were increased by Chairman’s fee £294,600 £287,600 2.4% 2.4% from £55,100 to £56,450, and Fee paid to all Non-Executive Directors £56,450 £55,100 2.4% the Chairman’s fee was increased Supplementary fees: by 2.4% from £287,600 to £294,600. – Senior Independent Director £10,000 £10,000 0.0% These increases are in line with the general employee salary increase. – Audit Committee Chairman £15,000 £15,000 0.0% – Remuneration Committee Chairman £15,000 £15,000 0.0% The current fee levels, and those for – Corporate Responsibility Committee Chair £13,000 £13,000 0.0% the future financial year, are set out in – Treasury Committee Chairman £15,000 £15,000 0.0% the table. The Chairman, Senior Independent Director and Non-Executive Directors are appointed for a three year term, subject to annual re-election by shareholders following the annual Board Effectiveness evaluation process. This term can be renewed by mutual agreement, up to a maximum total tenure of nine years. The current Letters of Appointment are available on the Severn Trent Plc website. The Chairman, Andrew Duff, will be standing for re-election at the Company’s forthcoming AGM on 17 July 2019 and, in order to facilitate an effective succession plan, it is intended that he remains as Chairman until the announcement and induction of his successor.

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Directors’ remuneration report continued Remuneration

Employment at Severn Trent • Pay Comparisons: The Chairman and CEO regularly attend the Forum and in the coming year –– Alignment with Group performance; We have taken the opportunity to create the Committee Chairman, and other a new section in this report which brings –– Gender pay; and Non-Executive Directors will attend. visibility of remuneration across the The Forum provides the opportunity for –– Social Mobility Index. entire workforce together in one place. the Board to meet employees across Creating an awesome place to work Communication with employees the Severn Trent Group and enables is one of our key strategic priorities, their views to be fully considered at and one of the ways in which we aim to To ensure the voice of our employees Board level. Individual Directors provide achieve this is through a diverse and is heard, we have an active Employee feedback to the Board at each meeting. inclusive working environment, and by Forum (‘the Forum’) that meets every quarter to discuss business challenges The Board also receives feedback from rewarding our employees throughout the ‘Ask Liv’ section on the intranet. the organisation in a fair manner. and opportunities. The Forum is chaired In making decisions on executive jointly by a member of the Executive Remuneration principles pay, the Committee considers wider Committee and the Trade Unions. workforce remuneration and conditions, Members include representatives Our reward strategy is designed to and we believe that it is important to from HR, joint Trade Unions and support and reinforce Severn Trent’s be transparent about the link between employees from our other business purpose, vision and values and to reward the two. area employee forums. all of our employees for delivering against our strategic objectives. We have The objectives of the Forum are to: As part of our commitment to fairness, updated our remuneration principles to we have included in this section more • Involve employees by sharing support the next phase of our strategic information on our remuneration information on the future of our development. The principles that principles, wider workforce pay business and the water industry; we have developed apply across the conditions, the Committee’s remit, Group and are cascaded throughout • Work together on issues that affect our our Gender Pay statistics and the organisation. how remuneration aligns with employees; and The 2018 Code requires the Committee Group performance. • Work in partnership to deliver better to determine the Policy and practices solutions to improve the way we work. The Committee ensures that pay is fair for Executive Directors in line with a throughout the Company and makes During 2018/19, the CEO discussed number of factors set out in Provision 40, decisions in relation to the structure of the performance of the business with and further details on our remuneration executive pay in the context of the wider the Forum, together with key financial principles and how we have addressed workforce remuneration and the cascade information and ideas for efficiencies. the requirements are set out on of incentives throughout the business. page 109. The Committee’s remit extends down to Executives and senior management for which it recommends and monitors the level and structure of remuneration. This section of the report covers the following: Top 50 Best Places to Work • Communication with employees; Severn Trent Plc has been honoured “For employers, we know that a with a Glassdoor Employees’ Choice satisfied and engaged workforce • Severn Trent’s Award, recognising the Best Places helps drive financial performance. Remuneration Principles; to Work in 2019, based solely on Glassdoor Best Places to Work • Wider workforce considerations the input of employees, who elect winners are strategically investing and approach to fairness, including to provide feedback on their jobs, in company culture, career diversity and inclusion policies; work environments and companies growth opportunities and more, through Glassdoor. which also serves as a major • Introduction to wider Committee remit recruiting advantage,” said Dr. and the Committee’s report: Andrew Chamberlain, Glassdoor –– On wider workforce pay policies and Chief Economist. whether the approach to executive When sharing a company review on remuneration is consistent; and Glassdoor, employees are asked –– On the alignment of the incentives to rate their satisfaction with the operated by the Group with its company overall, and key workplace culture and strategy. factors like career opportunities, compensation and benefits, culture and values, senior management and work/life balance.

108 Severn Trent Plc Annual Report and Accounts 2019 Strategic report > Governance Group financial statements Company financial statements Other information

Our purpose: To serve our communities and build a lasting legacy

Our vision: To be the most trusted water company by 2020

How do we embed our purpose and vision in our remuneration guiding principles?

Our remuneration principles Support our purpose, Drive long-term Be simple, Encourage our Attract, motivate vision and values sustainable performance transparent and employees to think and retain all our and our wider for the benefit of all our easily understood and act like owners employees with diverse business goals customers, shareholders by internal and in the business backgrounds, skills and and wider stakeholders external stakeholders capabilities

How does the Committee address the requirements under Provision 40? Cultural alignment and Proportionality and risk Simplicity, clarity and Cultural alignment Clarity proportionality • A significant proportion predictability and risk • The Committee • The Committee ensures of remuneration is • The Committee • The Committee ensures ensures that Executive that the overall reward delivered in variable pay ensures the highest that a significant portion Directors are provided framework embeds linked to corporate standards of disclosure of reward is equity- with a remuneration our purpose, vision performance to our internal and based and thereby linked opportunity which is and values • Performance measures/ external stakeholders to shareholder return competitive against • The Committee reviews targets for incentives are • The Committee makes • Executives are required companies of a similar the executive reward objectively determined decisions on executive to build significant size and complexity, with framework regularly • Outcomes under pay in the context of personal shareholdings a strong emphasis on the to ensure it supports incentive plans are based all employees and the in the Company and this variable elements the Company’s on holistic assessment external environment is regularly monitored by strategic objectives of performance the Committee

Alignment of the Policy to the Provisions of the 2018 Code Clarity The Company’s performance remuneration is based on supporting the implementation of the Company’s strategy measured through KPIs which are used for the Annual Bonus and LTIP. This provides clarity to all stakeholders on the relationship between the successful implementation of the Company’s strategy and the remuneration paid.

Simplicity The Company operates a UK market standard approach to remuneration which is familiar to all stakeholders.

Risk The Policy includes the following: • Setting defined limits on the maximum awards which can be earned; • Requiring the deferral of a substantial proportion of the incentives in shares for a material period of time, helping to ensure that the performance earning the award was sustainable, and thereby discouraging short-term behaviours; • Aligning the performance conditions with the agreed strategy of the Company; • Ensuring a focus on long-term sustainable performance through the LTIP; and • Ensuring there is sufficient flexibility to adjust payments through malus and clawback and an overriding discretion to depart from formulaic outcomes, especially if it appears that the behaviours giving rise to the awards are inappropriate or that the criteria on which the award was based do not reflect the underlying performance of the Company.

Predictability Shareholders were given full information on the potential values which could be earned under the Plans on their approval. In addition, all the checks and balances set out above under ‘Risk’ were disclosed at the time of shareholder approval.

Proportionality The Company’s incentive plans clearly reward the successful implementation of the strategy, and through deferral and measurement of performance over a number of years ensure that the Executive Directors have a strong drive to ensure that the performance is sustainable over the long term. Poor performance cannot be rewarded due to the Committee’s overriding discretion to depart from the formulaic outcomes under the incentive plans if they do not reflect underlying business performance.

Alignment A key principle of the Company’s culture is a focus on customers and their experience; this is reflected directly in the type of to culture performance conditions used for the bonus. The focus on ownership and long-term sustainable performance is also a key part of the Company’s culture. In addition, the measures used for the incentive plans are measures used to determine the success of the implementation of the strategy.

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Wider Workforce considerations and our approach to fairness

Pay and alignment We recognise the central importance of all of our teams in delivering success and, as such, we seek to create an inclusive working environment, to reward our employees in a fair and equitable manner, and to provide fulfilling careers. We do this by providing all our employees with:

Number of Remuneration Eligibility employees covered element Details All employees 6,872 Salary Salaries are set to reflect market value of the role, and to aid (as at 31 March 2019) recruitment and retention. Employees who are not on a training rate of pay (such as apprentices) receive at least the voluntary Living Wage. We also monitor closely the rates of pay of people who are training with us to make sure they remain fair and competitive. Benefits All employees are eligible to participate in our flexible benefits scheme which we believe is one of the best in the industry and which is designed to support a positive work-life balance. 45% of our employees choose to tailor their benefits via our flexible benefits scheme. They have also saved a total of £56,309 through our employee discount partnerships since the scheme was launched. Pension We offer a market leading defined contribution pension scheme and double any contributions that employees make (up to a maximum of 15% of salary), regardless of level or seniority. When colleagues get closer to retirement, we provide education and support to help plan for the next stage of their lives. We are proud that 98% of our employees are members of the pension scheme and 57% pay contributions above the minimum of 3%. Annual bonus All of our people share in our success by participating in our all- employee bonus plan, ensuring all employees are aligned with the same measures and rewarded for achieving our key objectives. For this year the bonus paid out £909 to our frontline employees in Severn Trent Water Limited and Hafren Dfyrdwy. New starters, post 2 January 2019, were not eligible to receive a bonus. SAYE Offering the opportunity to participate in our Sharesave scheme encourages employee engagement and reinforces our strong performance culture, enabling all employees to share in the long-term success of the Company whilst also aligning participants with shareholder interests. Nearly 70% of our employees are active participants in our Sharesave scheme which gives employees an opportunity to save up to £500 per month over three to five years, with the option to buy Severn Trent Plc shares at a discounted rate at the end of the period. Management 374 LTIP The LTIP reinforces delivery of long-term creation of value and sector and senior A proportion of outperformance. management this population The retention of shares by Executive Directors for the longer term participate in the also supports a shared ownership culture in the Group. LTIP by annual invitation Executive Committee 11 Shareholding Supports alignment of Executives’ interests with shareholders. and Executive guidelines as a Directors % of salary CEO – 300% CFO – 200% Exec Co – 100%

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Our Social Purpose We are proud to be recognised as the As a result, we remain strongly first socially purposeful Company in committed to the long-term sustained the utility sector. Read more in our development of our employees and Social Purpose Chapter on page 6. communities through our evolving Our employees tell us we are doing diversity and inclusion policies. well on diversity and inclusion The diagram below summarises some through great scores in our employee of our activities and accomplishments engagement survey but we know there in this area: are further opportunities to reflect the demographics of our region.

Do more to support our development Recognise and fairly reward and wellbeing everyone’s contribution £10m 240 Investment in the Menopause awareness Severn Trent Academy programme, so far over supporting development 240 employees have Our 2019 starting Fairness, transparency of colleagues at all attended our menopause rates are c.£16,000 and alignment runs stages of their careers, workshops, 10% of whom for Apprentices, through our entire from foundation were male £16,900 pro rata customer focused apprenticeships and for Undergraduate bonus scheme from graduate entrants Placements and the top to the bottom through to higher c.£27,000 for Graduates of the Company and degree level apprenticeships and Masters degrees LGBT+ Ally campaign and Pride

Provide everyone the opportunity to succeed Be a company that we’re in a job that the community depends upon inspired to work for 2 days 24 Top 4 62% To enable employees Visited 24 schools The top 4 for women’s Employee engagement to participate in and colleges in social representation amongst which is 5 points ahead volunteering programmes, mobility cold spots Executive Committee and of the UK and Ireland and a third of our their direct reports within the average benchmark employees took this up FTSE100 recognised in the 2018 Hampton-Alexander Review Top 50 93% Trusted to Employability scheme Our graduate scheme do my job to support people with has a Black, Asian and learning difficulties to Minority Ethnic (‘BAME’) gain work experience representation of 31%, with and skills the equivalent figure for 92% our apprentices being 12% Proud to be part of Severn Trent

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Gender Pay Gap Reporting Pay quartiles Gender pay reporting legislation came into force in April 2017 and requires all UK employers with 250 or more employees to publish annual information illustrating pay differences Top between male and female employees. 72.4% quartile 27.6% At Severn Trent, we are passionate about equality, diversity and inclusion and are Upper middle committed to addressing our Gender 80.5% quartile 19.5% Pay Gap. We reported our Gender Pay Gap in 70.8% Lower middle 29.2% November 2018 in line with statutory quartile requirements. The data was based on Lower figures from 5 April 2018 and showed 57.1% quartile 42.9% a mean gap of 2.8% (last year 2.4%) and a median gap of 13.2% (14.6%). The increase in the mean reflects small changes in the number of men and The difference in hourly pay between men and women is women within our executive population, and the decrease in the median is primarily driven by a higher proportion 2.8% of females being recruited and promoted 1 2 3 4 5 within our senior managerial population. We continue to encourage and embrace Mean diversity, and are always looking 13.2% at ways in which we can build our inclusive approach. The full Gender Pay Gap report can be found on the Severn Trent The difference in annual bonus pay between men and women is website, detailing the methodology and definitions, including case studies showcasing the achievements of two of our employees, and information -50% 1 2 3 4 5 about our trailblazing menopause awareness campaign. Median 3.9%

112 Severn Trent Plc Annual Report and Accounts 2019 Strategic report > Governance Group financial statements Company financial statements Other information

Social Mobility Employer Our ranking has increased from 38th We also signed the Social Mobility Pledge Index 2018 to 20th in the Index due to the work we in 2019, which encourages companies have already undertaken in this area to to improve the UK’s record on social We were ranked as one of the Top enable those from lower socio-economic mobility. As part of this, we will: 50 employers in the Social Mobility backgrounds to succeed. Measures taken • Partner with schools and colleges Employer Index 2018 (‘the Index’). to improve social mobility include: The Index ranks participating employers to provide coaching through on their actions to access and progress • Targeting our outreach work at schools quality careers advice, enrichment talent from all backgrounds, and with above-average levels of free experiences and by mentoring people showcases their progress towards school meals/low levels of attainment from disadvantaged backgrounds improving social mobility. with a focus on Social Mobility or circumstances; Cold Spots; Having a workforce that is diverse • Provide structured work experience in terms of social background is as • Unlike many other organisations, and/or apprenticeship opportunities important to Severn Trent as being which offer apprenticeships at to people from disadvantaged diverse in terms of gender and race, and levels two and three, we offer higher backgrounds or circumstances; and apprenticeships; and the Index has assessed us on the actions • Adopt open employee recruitment we are taking to ensure we are open to • Removing the name, grades and practices which promote a level accessing and progressing talent from university attended from all stages playing field for people from all backgrounds. of the recruitment process for disadvantaged backgrounds our graduate and apprenticeship or circumstances. programmes. As a consequence, offers were made to individuals who would probably not have been recruited under the previous grade requirements.

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Introduction to Committee remit and the Committee’s report Remuneration element Details reviewed Salary Salary rises Process General positioning of base salary against market In order for the Committee to carry out Bonus Total eligible population (% of Group employees) its oversight review of wider workforce Target and maximum range (% of Salary) pay and policies and incentives, a specific Performance conditions in place across the Group process is being developed. This section Method of payment – cash or shares provides some detail on how the Committee will carry out its duties and Recovery provisions in place (malus and clawback) the key issues that will be considered. Long Term Total eligible population (% of Group employees) Incentive Plan Target and maximum range (% of Salary) The Committee will receive a report Type of performance conditions twice a year from the Group setting out key details of remuneration throughout Holding period the Group. The table sets out a summary Minimum shareholding requirement of the information that will be received Recovery provisions (malus and clawback) and discussed by the Committee at the Pension Defined Contribution end of the financial year. Total eligible population Levels of remuneration and the types Group contribution offered will vary across the Group % – Range of values depending on the employee’s level of For new EDs and existing EDs seniority and role. The Committee is not Employee contribution looking for an homogeneous approach Defined Benefit but, when conducting its review, it Total eligible population will pay particular attention to the Range of values following issues: • Whether the element of remuneration is consistent with the Remuneration Principles; • Whether any differences are objectively justifiable; and • Whether the approach seems fair and equitable in the context of other employees. Once the Committee has conducted its review of the wider workforce remuneration and incentives, it will consider the approach applied to the remuneration of the Executive Directors and senior management. In particular, the Committee is focused on whether, within the framework set out above, the approach to the remuneration of the Executive Directors and senior management is consistent with that applied to the wider workforce. The first report, as described above, is due to be considered by the Committee later in 2019. Details of the findings on the alignment of pay across the Group will be communicated to employees and reported on in next year’s Directors’ remuneration report.

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Pay comparisons

Our policy quantum compared Relative position of target total compensation with peers The following table shows the relative position of target total compensation under the policy for our Executive Positioning of total remuneration of Company relative to market benchmarks Directors compared with the FTSE51‑150. CEO When we set the remuneration for the Executive Directors, one of the factors the Committee considers is the relevant CFO market for Executive Directors, which we believe is the FTSE51-150, and the Bottom quartile 3rd quartile 2nd quartile Top quartile size of the Company compared with these peers. The Company is around the median of this comparator group by market capitalisation and the proposed target total compensation has been set broadly in line with this position.

Total shareholder return and total remuneration

CEO remuneration vs returns TotalSevern shareholder Trent Plc TSR returnFTSE and 100 indextotal TSR remunerationCEO total remuneration (£’000) Source: Datastream to shareholders 400 3,000 The graph shows the value at 31 March 2019 of £100 invested in Severn Trent 350 Plc on 1 April 2009 compared with 2,500 the value of £100 invested in the FTSE 300 2,000 100 index. The FTSE100 was chosen 250 as the comparator index because the Company is a constituent of that index. 200 1,500

The intermediate points show the value 150 at the intervening financial year ends. 1,000 100 Total shareholder return (£)

500 CEO total remuneration (£’000) 50

0 0

Total 2009shareholder2010 return2011 and2012 total2013 remuneration2014 2015 2016 2017 2018 2019

Severn Trent Plc TSR FTSE 100 index TSR CEO total remuneration (£’000) Source: Datastream

400 3,000 Total shareholder return over AMP 350 2,500 Total shareholder return TotalSevern shareholder Trent Plc TSR return over AMP Source: Datastream 300 The chart shows the value at 31 March 140 2,000 2019 of £100 invested in Severn 250 Trent at the start of the current AMP. 120 The intermediate points show the value 200 1,500 100 at the intervening financial year ends. 150 1,000 80100 Total shareholder return (£)

500 CEO total remuneration (£’000) 6050

0 40 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Total shareholder return (£) 20

0 Total shareholder2015 return over2016 AMP 2017 2018 2019

Severn Trent Plc TSR Source: Datastream

140

120

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2015 2016 2017 2018 2019 Governance

Directors’ remuneration report continued Remuneration

Remuneration of the CEO The figure of remuneration for the CEO over the last 10 financial years is shown in the table below. The annual bonus payout and LTIP vesting level as a percentage of the maximum opportunity is also shown. Year ended 31 March 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 CEO Tony Wray Tony Wray Tony Wray Tony Wray Tony Wray Liv Garfield Liv Garfield Liv Garfield Liv Garfield Liv Garfield Total remuneration(i) (£’000) 1,027.0 949.8 1,244.1 1,635.3 1,818.4 2,197.6 2,493.6 2,424.0 2,193.5 2,395.4 Annual bonus (% of maximum) 51.5% 43.2% 48.1% 82.4% 78.7% 52.0% 88.2% 75.8% 72.5% 70.2% LTIP vesting (% of maximum) 60.3% 0.0% 28.4% 57.5% 100.0% 100.0% 100.0% 100.0% 100.0% 100% SMP vesting (% of maximum) N/A N/A N/A 78.0% 64.3% N/A N/A N/A N/A N/A

(i) 2018 onwards includes any SAYE grants made during the year as well as dividend equivalents in respect of vested LTIP shares.

Percentage change in the remuneration of the CEO Percentage change in the remuneration of the CEO The table shows the movement in salary, CEO Average per employee benefits and annual bonus for the CEO 2018/19 2017/18 2018/19 2017/18 between the current and previous £’000 £’000 Change £’000 £’000 Change financial year compared with that of the – Salary(i) 708.0 690.6 2.5% 31.8(iv) 30.5 4.3% average employee. The Committee looks – Benefits(ii) 17.1 17.7 (3.4)% 0.4 0.4 0% to ensure that the approach to fair pay (iii) is implemented in practice throughout – Bonus 497.0 501.0 (0.8)% 1.7 1.8 (5.6)% the Group. (i) The salary figures shown are based on full time equivalent comparisons. The Committee has elected to use the (ii) The benefits figures include car allowance and family level private medical insurance for senior and average earnings per employee as this middle managers. avoids the distortions that can occur to (iii) The figures shown are reflective of any bonus earned during the respective financial year. Bonuses are paid in the following June. the Group’s total wage bill as a result of movements in the number of employees. (iv) The average pay increase for the wider workforce during the year was 3.0%. The comparator group used is Severn Trent employees in the UK. The Committee monitors this information carefully to ensure that there is not a divergence in the fixed pay of the CEO compared with the wider workforce. In addition, this information demonstrates the Company’s approach to bonus throughout the organisation with employees and the CEO benefiting when the Company does well.

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Annual Report on Remuneration Total single figure of remuneration (audited) The Annual Report on Remuneration and The total single figure of remuneration the Annual Statement will be put to an table below sets out the remuneration advisory shareholder vote at the AGM on received by the Directors for 17 July 2019. The information on pages 2018/19 (or for performance periods 117 to 122 is audited. ending in 2018/19 in respect of the long-term incentives) and, for the purposes of comparison, for 2017/18. Where necessary, further explanations of the values provided are included below. This table and the explanatory notes below this table have been audited.

Total single figure of remuneration (audited) Year ended 31 March 2019 Year ended 31 March 2018 Salary and Annual Salary Annual Executive fees Benefits bonus LTIP Pension Other Total and fees Benefits bonus LTIP Pension Other Total Directors (£’000)(i) (£’000)(ii) (£’000)(iii) (£’000)(iv) (£’000)(v) (£’000)(vi) (£’000) (£’000)(i) (£’000)(ii) (£’000)(iii) (£’000)(iv) (£’000)(v) (£’000)(vi) (£’000) Liv Garfield 703.7 17.1 497.0 1,001.7 175.9 – 2,395.4 687 18 501 811 172 4.5 2,193.5 James Bowling 424.0 16.5 299.5 402.5 106.0 4.5 1,253.0 414 19 302 319 104 – 1,157.8 Salary and Annual Salary Annual Non-Executive fees Benefits bonus LTIP Pension Other Total and fees Benefits bonus LTIP Pension Other Total Directors (£’000) (£’000) (£’000) (£’000) (£’000) (£’000) (£’000) (£’000) (£’000) (£’000) (£’000) (£’000) (£’000) (£’000) Andrew Duff (Chairman) 287.6 – – – – – 287.6 281 – – – – – 281 John Coghlan 85.1 – – – – – 85.1 84 – – – – – 84 Philip Remnant 70.1 – – – – – 70.1 69 – – – – – 69 Kevin Beeston 65.1 – – – – – 65.1 64 – – – – – 64 Dominique Reiniche 55.1 – – – – – 55.1 54 – – – – – 54 Dame Angela Strank 68.1 – – – – – 68.1 67 – – – – – 67

(i) Salaries are shown before the deductions of benefits purchased through the Company’s salary sacrifice scheme, such as pension contributions via salary sacrifice. Salary is based on salary earned during the financial year. (ii) Benefits include a car allowance of £15,000 p.a., family level private medical insurance, life assurance worth six times salary and participation in an incapacity benefits scheme. (iii) The annual bonus is paid 50% in cash and 50% in shares with the portion deferred into shares subject to continued employment for three years but with no further performance conditions attached. (iv) The value of the 2016 LTIP is based on the estimated value of shares calculated using the average share price for the period 1 January to 31 March 2019 of £19.80 and includes dividends paid to date. The prior year LTIP figure has been restated using the share price at the date of vesting and includes dividend equivalents in respect of vested shares. (v) The Executive Directors’ pension provision is equal to 25% of salary. No Executive Directors accrued benefits under any defined contribution pension plans during the year or have participated in a defined benefits scheme while an Executive Director. (vi) This figure relates to the difference between the market price and the discounted option price relating to an SAYE option granted during the financial year.

Relative importance of the spend on pay The table below shows the expenditure Relative importance of the spend on pay of the Company on staff costs against 2019 2018 dividends paid to shareholders for both £m £m % Change the current and prior financial periods, Staff costs(i) 309.4 288.1 7.4% and the percentage change between the Dividends 211.9 197.0 7.6% two periods. (i) Staff costs from continuing operations.

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Benefits for 2018/19 (audited) The value of benefits is based on the cost to the Company and there is no pre-determined maximum limit. The range and value of the benefits offered is reviewed periodically. In line with the Policy outlined on page 105, we show below the benefits received by the individual Executive Directors in the year, and their typical annual value where possible.

Benefits for 2018/19 (audited) Typical Typical Percentage annual value annual value increase/ 2018/19 2017/18 (decrease) Car allowance £15,000 £15,000 0% Private medical insurance £1,500 £1,500 0% Life assurance Up to 6 x salary Up to 6 x salary 0% Personal accident cover As per the Group-wide policy As per the Group-wide policy 0% Biennial health screening £581 per health screen £620 per health screen (6.3)% Incapacity benefits(i) Worth 75% of salary for a period of five Worth 75% of salary for a period of five 0% years (subject to qualifying criteria) years (subject to qualifying criteria)

(i) Incapacity benefit for Executive Directors and senior management is 75% of salary, and for the rest of the eligible workforce is 50% of salary.

Annual bonus outturn for 2018/19 overall bonus awarded to each Executive Personal objectives for the Executive Director, is set out in the At a Glance Directors continue to be linked to our Full detail on the Company’s section on page 100. The table provides strategic framework and were shared performance during the financial year detail on the performance outcomes for across the team, with each Executive can be found in the Strategic report. both Executive Directors in relation to Director leading on the areas which The performance outcomes in respect of their specific personal objectives. best align to their accountabilities financial performance conditions, and the and expertise.

CEO Objective Key achievements Performance and activity in 2018/19 outcome Embed customers • Achieved customer ODI uncapping enabling benefits of outperformance to be shared at the heart of all we do with customers. Fully met Deliver on customer • 40% year-on-year improvements in Supply Interruptions. measures through • Ofwat approved waste uncapping benefiting the remainder of AMP6. customer ODIs • Supported 52,838 vulnerable customers. • Retained UQ for Customer Service Index for 2018/19.

Drive operational • Significant improvements have been made in waste networks ODIs during AMP6, excellence and including 50% reduction in total flooding incidents (internal and external), and year- Fully met continuous innovation on-year reduction in the number of Cat3 pollutions. Deliver UQ plans • Delivery of 2018 Agrivert acquisition. across Waste, • Significant improvements in leakage year on year, including leakage work in progress Water and Retail down by 65% and a 50% improvement in the median no. of days to fix a leak. • New customer first programme rolled out to all Contact Centre staff.

Invest responsibly Taken actions to reduce risk scores across a range of areas through reviewing and for sustainable growth embedding control and assurance frameworks, additional infrastructure investment Fully met Achieve material and identification and implementation of remedial plans. improvements in some of our key Board and STEC level Enterprise Risk Management (‘ERM’) risks

Change the market • PR19 fast-tracked. for the better • Only utility to be named as a Pathfinder by The Purposeful Company. Fully met Produce compelling cases for investment at PR19 that enable strong Regulatory Capital Value (‘RCV’) growth over AMP7 and AMP8

Create an awesome • Overall QUEST score held flat in spite of exceptional work effort and unprecedented place to work external factors affecting normal day-to-day working. We are five points above the UK Fully met Continue on improving and Ireland benchmark. overall QUEST • Social Mobility Employer Index ranking increased from 38th to 20th. engagement scores

118 Severn Trent Plc Annual Report and Accounts 2019 Strategic report > Governance Group financial statements Company financial statements Other information

CFO Objective Key achievements Performance and activity in 2018/19 outcome Embed customers • Identified and made improvements in reporting and analysis, enabling management at the heart of all we do to have greater insight when making in-year decisions. Fully met Support customer ODIs • Ofwat approved waste uncapping benefiting the remainder of AMP6.

Drive operational • Produced high quality Annual Performance Reports for both Severn Trent Water excellence and and Hafren Dyfrdwy. Fully met continuous innovation • Embedded robust financial resilience processes, e.g. early adoption of Ofwat’s Continue the evolution proposed stress testing scenarios for PR19. of regulatory submissions and building financial resilience

Invest responsibly • Implemented improved capital governance model, enabling more efficient project for sustainable growth resource allocation. Fully met Support effective • Successful creation of £100m ‘Spend to Save’ capital fund targeted at operational decision-making in Capital efficiencies for AMP7. Delivery, delivering efficiencies and effective resource allocation

Change the market • Created cost-effective Assurance plan as part of PR19 submission, and for the better achievement of fast-track status has enabled early implementation. Fully met Deliver Finance plan for PR19, and an excellent assurance programme for PR19 submission

Create an awesome • Launched Finance for the Future model designed to improve effectiveness, place to work embrace innovation and drive efficiency towards AMP7 Totex challenges, Fully met Develop breadth and supported by an award winning study programme for future talent (graduates depth of experience and apprentices). and expertise across whole Finance team

Severn Trent Plc Annual Report and Accounts 2019 119 Governance

Directors’ remuneration report continued Remuneration

LTIP awards vesting in relation to performance in 2018/19 (audited) The table below shows the outcome in respect of the 2016 LTIP awards, granted on 21 June 2016, which had performance periods ended 31 March 2019 and indicates the resulting number of shares vesting and their value. The LTIP based on RoRE over the three years to 31 March 2019 will vest in full. This is representative of continued solid performance in customer ODIs, financing and Totex. Detail on the performance outcome is given in the At a Glance section on page 102.

LTIP awards vesting in relation to performance in 2018/19 (audited) Value of Value dividend attributable equivalents Total value Value of to share Value of due on of LTIP Number award at End of Number of price LTIP shares vesting (Single of shares grant performance % award shares Vesting movement vesting(i) shares(ii) Figure) Executive granted (£’000) period vesting vesting date (£’000) (£’000) (£’000) (£’000) CEO 46,115 £995.6 31/03/19 100% 46,115 21/06/19 £0 £913.2 £88.5 £1,001.7 CFO 18,529 £400.0 31/03/19 100% 18,529 21/06/19 £0 £366.9 £35.6 £402.5

The RoRE calculation used for LTIPs differs slightly from that used in the Annual Performance Report, which uses the Ofwat definition. The LTIP measure seeks to align better our LTIP targets to actual cash flows and against a clearly defined target. In this measure, financing outperformance is based on actual gearing rather than the notional capital structure and compares our cost of debt against the allowance in the Ofwat Financial Model. It includes profits/losses associated with land sales, miscellaneous activities and the impact of the wholesale revenue forecasting incentive mechanism. (i) Based on the average share price over the final three months of the performance period £19.80 as the awards will not be released until after the end of the closed period. (ii) Based on dividends paid in the period since date of grant to 31 March 2019.

Payments for loss of office There were no payments for loss of office in the year.

Payments to past Directors (audited) Emma FitzGerald Full details of Emma FitzGerald’s unvested shares under the deferred Annual Bonus Scheme and LTIP awards can be found in the 2017/18 Directors’ remuneration report. The table below sets out details of the LTIP award which will be released to her on the ordinary vesting date, 21 June 2019. She will also receive dividend equivalents on the vested shares.

Award End of performance period Number of shares 2016 LTIP 31 March 2019 11,243

Outstanding scheme interests, including share awards granted during the year (audited) The table below sets out details of the Executive Directors’ outstanding share awards as at 31 March 2019.

Directors’ shareholdings and summary of outstanding share interests (audited)

Percentage Awards granted during the year Maximum vesting at Exercise End of End of Vesting/ number of threshold price performance holding exercise Face value Executive Award type (i) shares(ii) performance (pence) period period date(iii) Basis of award (£’000) Notes Liv Garfield 2016 LTIP 46,115 25% – 31/03/19 – 21/06/19 (a) 2016 ABS 16,260 – – 31/03/16 – 28/06/19 (c) 2017 LTIP 42,383 25% – 31/03/20 – 20/06/20 (a) 2017 ABS 12,850 – – 31/03/17 – 28/06/20 (c) 2018 SAYE 1,089 – 1,652 – – May-21 – – (d) 2018 LTIP 72,880 25% – 31/03/21 24/07/23 24/07/21 200% of salary £1,381 (b) 2018 ABS 13,394 – – 31/03/18 – 19/06/21 Deferred bonus £250.5 (c) Total 204,971 James Bowling 2016 LTIP 18,529 25% – 31/03/19 – 21/06/19 (a) 2016 ABS 9,634 – – 31/03/16 – 28/06/19 (c) 2016 SAYE 1,044 – 1,724 – – May-19 – – (d) 2017 LTIP 17,028 25% – 31/03/20 – 20/06/20 (a) 2017 ABS 7,693 – – 31/03/17 – 28/06/20 (c) 2018 LTIP 32,941 25% – 31/03/21 24/07/23 24/07/21 150% of salary £624.3 (b) 2018 ABS 8,072 – – 31/03/18 – 19/06/21 Deferred bonus £151.0 (c) 2019 SAYE 1,221 – 1,474 – – May-22 – – (d) Total 96,162

(i) LTIP awards are conditional share awards subject to performance conditions. ABS awards are deferred shares which are not subject to further performance conditions. (ii) Additional dividend equivalent shares may be released where provided in the rules. (iii) Awards that are due to vest in a closed period will be released as soon as practicable after the end of the closed period.

120 Severn Trent Plc Annual Report and Accounts 2019 Strategic report > Governance Group financial statements Company financial statements Other information

a) 2016 and 2017 LTIP awards All of the LTIP awards are subject to a 2016 and 2017 LTIP awards RoRE performance condition measured 3 day average Threshold share price over three financial years, and average vesting FD Full vesting used for grant RoRE performance is compared with the Award Grant date (Baseline) (Outperformance) calculations baseline figure set by Ofwat in our FD. 2016 LTIP 21/06/2016 5.65% x1.39 (equivalent to 7.86%) £21.59 The award will vest at threshold (25%) 2017 LTIP 20/06/2017 5.65% x1.39 (equivalent to 7.86%) £23.96 if average RoRE matches the baseline figure, and increases on a straight- line basis to full vesting (100%) for outperforming the baseline. b) 2018 LTIP award (awards granted 2018 LTIP award (awards granted during the year) during the year) 3 day average In 2018, the LTIP maximum opportunity Threshold share price vesting FD Full vesting used for grant changed from 150% to 200% of salary Award Grant date (Baseline) 1.39x FD (Outperformance) calculations for the CEO and 100% to 150% of salary UQ RoRE for the CFO. We retained RoRE as a compared to performance condition and aligned the 2018 LTIP 24/07/18 5.65% Equal to 7.86% WaSCs £18.95 Company definition of RoRE with the Ofwat definition. We recalibrated the previous stretch target as the new target and introduced a new relative stretch target of UQ performance against the WaSC peer group, as well as introducing a two year post-vesting holding period. c) Deferred shares under the annual Deferred shares under the annual bonus scheme bonus scheme (including awards (including awards granted during the year) granted during the year) 3 day average share price Each year, 50% of an Executive Award Relating to FY Grant date used for grant calculations Director’s annual bonus is deferred in 2016 ABS 15/16 28/06/16 £21.59 shares for three years. The awards are 2017 ABS 16/17 28/06/17 £23.96 granted in the form of deferred shares. 2018 ABS 17/18 19/06/18 £18.70 The deferred shares relating to the annual bonus for 2018/19 will be granted in June 2019. d) Save As You Earn (‘SAYE’) The Executive Directors, in common with all eligible UK employees, are entitled to participate in the Company’s SAYE Scheme.

Severn Trent Plc Annual Report and Accounts 2019 121 Governance

Directors’ remuneration report continued Remuneration

Directors’ shareholdings and The Committee believes that it is an External directorships summary of outstanding share essential part of the Policy that Executive Liv Garfield was appointed a member of interests (audited) Directors become material shareholders. the Takeover Panel in November 2017. The retention and build-up of equity In respect of her appointment for the Page 103 in the At a Glance section is important in a long-term business year ended 31 March 2019, she was paid summarises the shareholding such as Severn Trent as it encourages fees of £12,000 which she retained. requirements under which Executive decisions to be made on a long-term Directors are expected to build and sustainable basis for the benefit of Service contracts for maintain a shareholding in the Company, customers and shareholders. Executive Directors and whether Executive Directors have Copies of the service contracts of the There has been no change in the met the shareholding requirements. Executive Directors and the Letters Directors’ interests in the ordinary share of Appointment of the Non-Executive The shareholding requirements for the capital of the Company between those Directors are available for inspection at CEO and CFO increased in 2018/19. set out below and 20 May 2019. the Company’s registered office during normal business hours.

Interests in shares as at 31 March 2019 Outstanding scheme interests % Shareholding Beneficially LTIP Annual Bonus SAYE guideline Director owned shares(i) shares(ii) options Total achieved(iii) Kevin Beeston 2,244 – – – 2,244 – Dominique Reiniche 400 – – – 400 – John Coghlan 2,670 – – – 2,670 – Andrew Duff 8,184 – – – 8,184 – Philip Remnant 1,969 – – – 1,969 – Dame Angela Strank 459 – – – 459 – Liv Garfield 137,349 161,378 42,504 1,089 342,320 147% James Bowling 32,075 68,498 25,399 2,265 128,237 103%

(i) LTIP share awards subject to ongoing performance conditions. (ii) ABS awards are deferred shares which are not subject to further performance conditions. (iii) The share price used to calculate the percentage of the shareholding guideline achieved was £19.76 (as at 31 March 2019). The guideline figures include unvested ABS shares (50% deducted to cover statutory deduction).

Service contracts for Executive Directors Name Date of service contract Nature of contract Notice period Termination payments Liv Garfield 10.04.14 Payments for loss of office comprise a maximum Rolling 12 months James Bowling 01.04.15 of 12 months’ salary and benefits only

Philip Remnant Chairman of the Remuneration Committee 20 May 2019

122 Severn Trent Plc Annual Report and Accounts 2019 Governance Strategic report > Governance Group financial statements Company financial statements Directors’ report Other information

The Directors present their report and Insurance and indemnities All our training, promotion and career the audited Group financial statements, The Company maintains Directors’ and development processes are in place for for the year ended 31 March 2019. Officers’ liability insurance in respect all our employees to access, regardless The performance review of the Company of legal action that might be brought of their gender, race, age or disability. can be found within the Strategic report. against its Directors and Officers. The provision of occupational health This provides detailed information As permitted by the Company’s Articles programmes is of crucial importance to relating to the Group, its business of Association (the ‘Articles’), and to the Severn Trent with the aim of keeping our model and strategy, the operation of its extent permitted by law, the Company employees fit, healthy and well, including businesses, future developments and the indemnifies each of its Directors and an employee assistance programme. results and financial position for the year other Officers of the Group against Additional information on our diversity ended 31 March 2019. The Governance certain liabilities that may be incurred as aims and progress can be found on report set out on pages 64 to 128 is a result of their positions with the Group. pages 44 and 82. incorporated by reference into this report The indemnity was in force throughout and, accordingly, should be read as part the tenure of each Director during the Employee engagement of this report. last financial year, and is currently We continuously engage with our Details of the Group’s policy on in force. employees in a number of ways to addressing the principal risks and Severn Trent Plc does not have in place accommodate different working uncertainties facing the Group are set any indemnities for the benefit of the patterns. This includes: out in the Strategic report on pages 54 External Auditor. • all people briefings, ‘Team Talk’; to 61. Employees • corporate communications events and Principal activity The average number of employees within roadshows held by functions across The principal activity of the Group is the Group is shown in note 9 to the Group the Company; to treat and provide water and remove financial statements. • a dedicated intranet, ‘Streamline’; waste water in the UK and Ireland. Severn Trent Plc believes a diverse • online news portal and weekly Details of the principal joint ventures, and inclusive workforce is a key roundup, ‘Pipeline News’; associated and subsidiary undertakings factor in being a successful business. of the Group as at 31 March 2019 are Through our Diversity and Equal • an active employee social media shown in note 19 and 46 to the Group Opportunities Policy, the Company seeks presence, ‘Yammer’; financial statements. to ensure that every employee, without • conference calls and email; exception, is treated equally and fairly Areas of operation and that all employees are aware of their • leadership engagement channels During the course of 2018/19, the Group responsibilities. This means more than – Executive Director blogs, senior had activities and operations in the UK ensuring we don’t discriminate in any management monthly visibility and Ireland. way – we want to create and maintain programme and quarterly events; a culture open to a diverse population. Directors and their interests • Employee Forum; and Severn Trent believes that no one should Biographies of the Directors currently be hurt or made unwell by what we • regular meetings with Trade Unions. serving on the Board are set out on do. We did not experience any major pages 66 and 67. Details of the financial and economic safety incidents and no fatalities during factors affecting the performance of the All of the Directors will be offering the year. Company are shared with all employees themselves for re-election at the Annual We are an equal opportunities employer at the appropriate time using the General Meeting (‘AGM’), as set out and welcome applications from all methods listed above. in the Governance report on page 84. individuals, including those with a The Chairman, Andrew Duff, will be We provide opportunities for employees disability. We are fully committed to give their feedback to the Company standing for re-election at the Company’s to supporting applications made by forthcoming AGM on 17 July 2019 and, in in a number of ways, from team or disabled persons, and make reasonable shift meetings, our Employee Forum order to facilitate an effective succession adjustments to their environment plan, it is intended that he remains as and QUEST. More information on where possible (having regard to their employee engagement can be found in Chairman until the announcement and particular aptitudes and abilities). induction of his successor. the stakeholder engagement section on We are also responsive to the needs pages 73 to 74. Details of Directors’ service of our employees. As such, should any contracts are set out in the Directors’ employee become disabled during their Remuneration report on page 122. time with us, we will actively re-train The interests of the Directors in the that employee and make reasonable shares of the Company are shown on adjustments to their environment page 120 of that report. The Board has a where possible, in order to keep them documented process in place in respect in employment with us. of conflicts.

Severn Trent Plc Annual Report and Accounts 2019 123 Governance

Directors’ report continued Other disclosures

The Company is keen to encourage Dividend Policy With regard to the appointment and greater employee involvement in the In 2017/18, we enhanced our Dividend replacement of Directors, the Company Group’s performance through share Policy for the period 2015-2020, with is governed by its Articles, the Code, ownership. To help align employees’ effect from 2017/18, and will now the Companies Act 2006 and related interests with the success of the increase the dividend by growth of at legislation. The Articles may be Company’s performance, we operate least RPI +4% each year. This replaced amended by Special Resolution of the an HMRC approved all-employee plan, the previous Dividend Policy of annual shareholders. The powers of Directors the Severn Trent Sharesave Scheme growth of the dividend at no less than RPI are described in the Severn Trent Plc (‘Sharesave’), which is offered to UK until March 2020. Matters Reserved to the Board document employees on an annual basis. which can be found on our website, the The Dividend Policy reflects our strong Articles and the Governance report on 69.7% of Severn Trent’s UK employees operational delivery and financial page 71. now participate in the Sharesave performance, while ensuring that our scheme, with the average participant bills are affordable for all our customers. Under the Articles, the Directors have contributing £276 each month. When determining the policy the Board authority to allot Ordinary Shares, subject to the aggregate nominal amount During the year, the Company has considered various scenarios and limit set at the 2018 AGM. remained within its headroom limits for sensitivities, and reviewed the impact of adverse changes in inflation and interest the issue of new shares for share plans Change of control as set out in the rules of the above plan. rates on key metrics. The Board believes that the Dividend Policy is commensurate There are a number of agreements that Research and development with a sustainable investment grade take effect after, or terminate upon, a change of control of the Company, Innovative use of existing and emerging credit rating. such as commercial contracts, bank technologies will continue to be crucial Capital structure loan agreements, property lease to the successful development of new arrangements and employee share products and processes for the Group Details of the Company’s issued share plans. None of these are considered to be and our products must continue to capital and of the movements during the significant in terms of their likely impact deliver value for customers. year are shown in note 10 to the Company financial statements. The Company on the business of the Group as a whole. Expenditure on research and has one class of Ordinary Shares There are no agreements between the development is set out in note 7 which carries no right to fixed income. Company and its Directors or employees to the Group financial statements. Each share carries the right to one vote that provide for compensation for loss at General Meetings of the Company. of office or employment because of a Internal controls The issued nominal value of the Ordinary takeover bid. Further details of our internal control Shares is 100% of the total issued framework can be found in the Audit nominal value of all share capital. Substantial shareholdings Committee report on page 89. As at 31 March 2019, the Company There are no specific restrictions on the had been notified in accordance with Treasury management size of a holding nor on the transfer of Chapter 5 of the Disclosure Guidance Details on our Treasury Policy and shares, which are both governed by the and Transparency Rules of the following management are set out in the Chief general provisions of the Articles and major shareholdings: Financial Officer’s review on page 52. prevailing legislation. The Directors are not aware of any agreements between No of Voting Post balance sheet events holders of the Company’s shares that Ordinary rights Details of post balance sheet events may result in restrictions on the transfer Name of Shares held are set out in note 43 to the Group of securities or on voting rights. holder column (%) financial statements. Lazard Asset 23,307,808 9.82% Details of employee share schemes are Management set out in note 37 to the Group financial Dividends BlackRock 18,722,846 7.73% statements. For shares held by the An interim dividend of 37.35 pence per Severn Trent Employee Share Ownership RReef Real 9,729,101 2.73% Ordinary Share was paid on 4 January Trust, the Trustee abstains from voting. Estate 2019. The Directors recommend a final Legal & General 9,285,649 3.86% dividend of 56.02 pence per Ordinary No person has any special rights of Investment Share to be paid on 19 July 2019 control over the Company’s share capital Management to shareholders on the register on and all issued shares are fully paid. Vanguard Group 8,336,011 3.51% 14 June 2019. This would bring the total dividend for 2018/19 to 93.37 pence per Maple-Brown 8,083,911 2.55% Ordinary Share (2017/18: 86.55 pence). Abbott The payment of the final dividend is Pictet Asset 7,781,012 3.06% subject to shareholder approval at Management the AGM.

124 Severn Trent Plc Annual Report and Accounts 2019 Strategic report > Governance Group financial statements Company financial statements Other information

As at 20 May 2019, the Company had been Severn Trent’s policy is not to make We reduce our carbon footprint notified of the following holdings of voting any donations for political purposes The UK is playing a leading part in rights in the Ordinary Share capital of in the UK, or to donate to EU political reducing carbon emissions. We want to the Company: Lazard Asset Management parties or incur EU political expenditure. play our part in reducing our impact by 23,425,859 shares (9.88%); BlackRock, Accordingly, neither Severn Trent reducing our carbon emissions. As the Inc shares 17,747,520 (7.48%); Legal Plc nor its subsidiaries made any majority of our carbon emissions are & General Investment Management political donations or incurred political driven by our use of energy, managing 9,072,090 shares (3.83%); Vanguard expenditure in the financial year carbon also means managing costs. Group 8,367,928 shares (3.53%); Qatar under review. We therefore aim to reduce carbon Investment Authority shares 7,964,730 Under the provisions of the Political emissions and increase our generation of (3.35%); Pictet Asset Management Parties Elections and Referendums renewable energy. shares 7,306,925 (3.08%); RReef Real Act 2000 (the relevant provisions of Estate 6,594,363 shares (2.78%); We have recently committed to becoming which are now contained in Part 14 of Maple-Brown Abbott 6,047,772 shares Net Carbon Zero by 2030. This is the Companies Act 2006), shareholder (2.55)%; SSGA 5,551,542 shares (2.34%). even more ambitious than a science- authority is required for political based target and builds on our long The percentage of voting rights detailed donations to be made or political track record of making year-on-year above was calculated at the time of expenditure to be incurred by the reductions in emissions. We will set out the relevant disclosures were made in Company or any of its subsidiaries in the our detailed strategy to deliver this goal accordance with Rule 5 of the Disclosure EU and disclosure of any such payment as part of our forward plans. Guidance and Transparency Rules. must be made in the Annual Report and Accounts. The legislation gives a wide The Carbon Trust Standard recognises Authority to purchase shares definition of what constitutes political our consistent emissions reductions and The Company was given authority at its donations and political expenditure effective carbon management processes AGM in 2018 to make market purchases including sponsorship, subscriptions, and we scored in the top quartile of of Ordinary Shares up to a maximum payment of expenses, paid leave for companies. We continue to report to the number of 23,677,393 Ordinary Shares. employees fulfilling public duties Carbon Disclosure Project (‘CDP’) each During the year, no Ordinary Shares have and support for bodies representing year which means our climate change been repurchased. the business community in policy information is publicly accessible. review or reform. The Company has CDP request information about climate Authority will again be sought from change from companies on behalf of shareholders at this year’s AGM to therefore obtained limited authority from shareholders as a precautionary investors and score each company purchase up to a maximum of 23,757,109 on the quality and completeness of Ordinary Shares. measure to allow the Company to continue supporting the community and their responses. The Directors believe that it is desirable such organisations without inadvertently This year, we again increased renewable to have the general authority to buy breaching the legislation. energy generation across Severn Trent back the Company’s Ordinary Shares in At the 2018 AGM, shareholders gave (including the total generation of energy order to provide maximum flexibility in from Agrivert food waste business, the management of the Group’s capital the Company authority to make political donations or to incur political which we purchased in December 2018). resources. However, the authority would We generated an equivalent of 43% of only be used if the Board was satisfied expenditure in the EU (which would not ordinarily be regarded as political Severn Trent Water Limited’s electricity at the time that to do so would be in the needs. This was up from 38% in 2017/18. best interests of shareholders. donations) up to an aggregate annual limit of £150,000 for the Company and We continue to lead the UK water industry, and are on track to generate the Contributions for political its subsidiaries. Pursuant to those equivalent of 50% of our electricity needs and charitable purposes authorities, during the year ended by the end of 2020. Donations to charitable organisations 31 March 2019, the Group incurred costs during the year amounted to £65,936 of £nil (2018: £nil). Those authorities We plan to continue to reduce our (2018: £81,947). Donations are given to will expire at the 2019 AGM and, in operational emissions by reducing our charities whose projects align closely line with market practice to renew the energy use and increase our renewable with our aim to promote the responsible authorities on an annual basis, the Board energy generation. Pursuing these use of water resources and waste water has decided to put forward a resolution measures will continue to reduce our services which provide the opportunity to this year’s AGM to renew the key sources of emissions, reduce our for longer-term partnerships. authorities to make donations to political reliance on the electricity grid and bring In addition, we provide donations to organisations and to incur political financial benefits for our customers employee nominated charities through expenditure up to a maximum aggregate and investors. a matched funding scheme and health of £150,000 p.a. As permitted under the and safety reward schemes. We are Companies Act 2006, this resolution also committed to supporting WaterAid, also covers any political donations made the UK’s only major charity dedicated or political expenditure incurred by any to improving access to safe water, subsidiaries of the Company. hygiene and sanitation in the world’s poorest countries.

Severn Trent Plc Annual Report and Accounts 2019 125 Governance

Directors’ report continued Other disclosures

Report on greenhouse gas emissions This is the sixth year Severn Trent has Severn Trent carbon footprint kt CO2e been required to report greenhouse gas (‘GHG’) emissions in the Directors’ report. 800 Severn Trent is committed to reducing 700 its GHG emissions. For Severn Trent Water, which accounts for 99% of our 600 total Group emissions, we have been 500 publicly reporting on our emissions since 2002. In that time we have reduced our 400 emissions by being more energy efficient and generating more renewable energy. 300

Our GHG emissions are reported in 200 tonnes of carbon dioxide equivalent

(tCO2e), for the period 1 April 2018 to 100 31 March 2019. 0 Our total net emissions have fallen again this year, due to our increased generation 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 of renewable energy, a reduction in the emissions-intensity of UK grid electricity GRID BALANCING and reduced process emissions as we We help National Grid balance supply and demand, so that electricity is move to more advanced digestion of our available for everybody. We do this by turning assets such as treatment sites sewage sludge. Our net emissions have and generators on and off as requested by the Grid. We can now provide flexible also fallen as we have now secured a capacity equivalent to the power demand of a town the size of Stafford. This year proportion of our electricity supply from we won the Energy and Carbon Initiative of the year at the Water Industry accredited renewable energy sources. Achievement awards in recognition of this work. We have reported this market-based benefit separately in the table below. BUYING GREEN The GHG data we report is reported As part of our efforts to reach carbon neutrality, we are now securing a internally during the year to the proportion of our imported electricity from accredited renewable sources. Corporate Responsibility Committee We plan to increase the amount of renewable energy we procure in future and to the Board. We have subjected to reduce our footprint further. our GHG data and processes to external assurance by Jacobs. Severn Trent Plc Direct Our approach to reporting is based on Operational Greenhouse the GHG Protocol Corporate Accounting Gas Emissions (tonnes CO2e) 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 and Reporting Standard and we have Emissions from combustion of 132,535 132,406 134,584 138,131 134,307 132,360 included only emissions from the assets fuel and operation of facilities which we own and operate and which (Scope 1) we can directly influence and reduce, Emissions from electricity 330,679 357,756 337,028 294,426 279,393 217,726 known as the financial control boundary. purchased for own use (Scope 2) In accordance with the reporting Total Annual Gross 463,214 490,163 471,612 432,557 413,700 350,086 regulations, we have not reported on Operational Emissions emissions we can influence, but which Emissions benefit of the 21,672 38,878 45,085 42,069 45,333 46,986 we are not responsible for, referred to as renewable energy we export (including biomethane exported for which indirect emissions. we hold green gas certificates) For the appointed UK Water businesses Emissions reduction from – – – – – 34,818 Severn Trent Water and Hafren Dyfrdwy, purchase of renewable energy (market-based carbon accounting benefit) we have calculated our emissions using the ‘Carbon accounting in the UK Water Total Annual Net 441,542 451,285 426,527 390,488 368,367 268,283 Operational Emissions Industry: methodology for estimating operational emissions, Version 13’ (released April 2019). This is a peer- reviewed calculation tool developed and Annual GHG intensity ratio (t CO2/unit) 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 used by all the major water companies in Operational GHG emissions of the UK. It is updated each year to include Severn Trent per £m turnover 248.6 255.2 234.7 214.0 217.4 151.8 the latest available emissions factors. For non-appointed business emissions, we have used the latest Defra emissions factors which include the relevant conversion factors for overseas electricity.

126 Severn Trent Plc Annual Report and Accounts 2019 Strategic report > Governance Group financial statements Company financial statements Other information

Our gross emissions total in the table on page 126 applies the ‘location- Disclosures required under Listing Rule 9.8.4R based’ accounting methodology for grid The information required to be disclosed by Listing Rule 9.8.4R can be located emissions, which is consistent with in the following pages of this Annual Report and Accounts: previous years. This year, we have also Section Information to be included Location shown the net benefit of our renewable (1) A statement of the amount of interest capitalised 155 energy procurement via our suppliers, applying the ‘market-based’ accounting (4) Details of long-term incentive schemes 106 methodology, which is included in our net (8) Section 7 in relation to subsidiary undertakings 193 to 194 emissions total. (2), (5), (6), (7), Not applicable (9)–(14) Supplier payment policy Individual operating companies within the Group are responsible for establishing appropriate policies with External Auditor regard to the payment of their suppliers, Having carried out a review of their in accordance with the Prompt Payment effectiveness during the year, details Code (‘PPC’). The companies agree of which can be found in the Audit terms and conditions under which Committee report on page 90, the Audit business transactions with suppliers Committee has recommended to the are conducted. It is Group policy that Board the reappointment of Deloitte provided a supplier is complying with the LLP. The reappointment and a resolution relevant terms and conditions, including to that effect will be on the agenda at the prompt and complete submission of the AGM. Deloitte LLP indicated their all specified documentation, payment willingness to continue as Auditor. will be made in accordance with agreed The Audit Committee will also be terms. It is also Group policy to ensure responsible for determining the audit fee that suppliers know the terms on which on behalf of the Board. payment will take place when business is agreed. Accounts of Severn Trent Water Limited and Hafren Dyfrdwy Cyfyngedig Relevant audit information Separate Annual Performance The Directors confirm that: Reports for each of Severn Trent Water Limited and Hafren Dyfrdwy • so far as each of them is aware, Cyfyngedig are prepared and provided there is no relevant audit information to Ofwat. Copies are available on the of which the Company’s Auditor is respective websites. unaware; and Additionally, separate Annual Reports for • each of them has taken all the steps each of Severn Trent Water Limited and that he/she ought to have taken as Hafren Dyfrdwy Cyfyngedig are available a Director to make himself/herself on the respective websites. aware of any relevant audit information and to establish that the Company’s Annual General Meeting Auditor is aware of that information. The AGM of the Company will be held at This confirmation is given and should the Ricoh Arena, Phoenix Way, Coventry, be interpreted in accordance with CV6 6GE at 11am on Wednesday 17 July the provisions of section 418 of the 2019. The notice convening the meeting, Companies Act 2006. together with details of the business to be considered and explanatory notes for each resolution, is distributed separately to shareholders. It is also available on the Severn Trent Plc website. By order of the Board Bronagh Kennedy Group General Counsel and Company Secretary 20 May 2019

Severn Trent Plc Annual Report and Accounts 2019 127 Governance

Directors’ Responsibilities Statement Other disclosures

The Directors are responsible for In preparing the Group financial Responsibility Statement preparing the Annual Report and the statements, International Accounting Each of the Directors confirm that to the financial statements in accordance with Standard 1 requires that Directors: best of their knowledge: applicable law and regulations. • properly select and apply • the financial statements, prepared in Company law requires the Directors accounting policies; accordance with the relevant financial to prepare financial statements for • present information, including reporting framework, give a true each financial year. Under that law accounting policies, in a manner that and fair view of the assets, liabilities, the Directors are required to prepare provides relevant, reliable, comparable financial position and profit or loss of the Group financial statements in and understandable information; the Company and the undertakings accordance with International Financial included in the consolidation taken Reporting Standards (‘IFRSs’) as adopted • provide additional disclosures as a whole; by the European Union and Article 4 of when compliance with the specific the IAS Regulation and have elected requirements in IFRSs are insufficient • the Strategic report includes a to prepare the Company financial to enable users to understand the fair review of the development and statements in accordance with United impact of particular transactions, performance of the business and Kingdom Generally Accepted Practice other events and conditions on the the position of the Company and (United Kingdom Accounting Standards entity’s financial position and financial the undertakings included in the and applicable law) including FRS 101 performance; and consolidation taken as a whole, ‘Reduced Disclosure Framework’. together with a description of the • make an assessment of the Company’s Under company law the Directors must principal risks and uncertainties that ability to continue as a Going Concern. not approve the accounts unless they they face; and are satisfied that they give a true and The Directors are responsible for • the Annual Report and financial fair view of the state of affairs of the keeping adequate accounting records statements, taken as a whole, are fair, Company and of the profit or loss of the that are sufficient to show and explain balanced and understandable and Company for that period. the Company’s transactions and disclose provide the information necessary for with reasonable accuracy at any time the In preparing the parent company shareholders to assess the Company’s financial position of the Company and financial statements, the Directors are position and performance, business enable them to ensure that the financial required to: model and strategy. statements comply with the Companies • select suitable accounting policies and Act 2006. They are also responsible for This Responsibility Statement was then apply them consistently; safeguarding the assets of the Company approved by the Board of Directors and hence for taking reasonable steps on 20 May 2019 and is signed on its • make judgments and accounting for the prevention and detection of fraud behalf by: estimates that are reasonable and other irregularities. and prudent; The Directors are responsible for • state whether applicable UK the maintenance and integrity of the Accounting Standards have been corporate and financial information followed, subject to any material included on the Company’s website. Andrew Duff James Bowling departures disclosed and explained in Legislation in the UK governing the Chairman Chief Financial Officer the financial statements; and preparation and dissemination of 20 May 2019 • prepare the financial statements on financial statements may differ from the Going Concern basis unless it is legislation in other jurisdictions. inappropriate to presume that the Company will continue in business.

128 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance > Group financial statements Company financial statements Independent Auditor’s report to the members Other information of Severn Trent Plc

Report on the audit of the financial statements Opinion In our opinion: • the financial statements of Severn Trent Plc (the ‘parent company’) and its subsidiaries (the ‘Group’) give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 March 2019 and of the Group’s profit for the year then ended; • the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union; • the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice, including Financial Reporting Standard 101 Reduced Disclosure Framework; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. We have audited the financial statements which comprise: • the consolidated income statement; • the consolidated and parent company statement of comprehensive income; • the consolidated and parent company balance sheets; • the consolidated and parent company statements of changes in equity; • the consolidated cash flow statement; and • the related notes to the consolidated financial statements 1 to 46 and the related notes to the parent company financial statements 1 to 18. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and IFRSs as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards, including FRS 101 Reduced Disclosure Framework (United Kingdom Generally Accepted Accounting Practice). Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the Group and the parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the Financial Reporting Council’s (the FRCs’) Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We confirm that the non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the parent company. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Summary of our audit approach Key audit matters The key audit matters that we identified in the current year were: • valuation of the provision for trade receivables in Severn Trent Water Limited; • valuation of the Group’s retirement benefit obligation; and • classification and valuation of capital expenditure in Severn Trent Water Limited. Within this report, any new key audit matters are identified with and any key audit matters which are the same as the prior year identified with . Materiality The materiality that we used for the Group financial statements was £18 million which was determined on the basis of profit before tax, gains/losses on financial instruments and exceptional items. Scoping Our audit scoping has resulted in over 95% of the Group’s net operating assets and profit before tax being subject to audit testing. Significant changes In the year ended 31 March 2018, we reported the “accuracy of wholesale revenue for non-household customers in our approach in the new water market” as a key audit matter. As the year ended 31 March 2019 represents the second year of the operation of this market, and processes and controls are embedded within the business, we no longer consider this to be a reportable key audit matter.

Conclusions relating to going concern, principal risks and viability statement Going concern We have reviewed the Directors’ statement in note 2 a) to the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them and their identification of any material uncertainties to the Group’s and the Company’s ability to continue to do so over a period of at least 12 months from the date of approval of the financial statements. We considered as part of our risk assessment the nature of the Group, its business model and related risks including where relevant the impact of Brexit, the requirements of the applicable financial reporting framework and the system of internal control. We evaluated the Directors’ assessment of the Group’s ability to continue as a going concern, including challenging the underlying data and key assumptions used to make the assessment, and evaluated the Directors’ plans for future actions in relation to their going concern assessment. We are required to state whether we have anything material to add or draw attention to in relation to that statement required by Listing Rule 9.8.6R(3) and report if the statement is materially inconsistent with our knowledge obtained in the audit. We confirm that we have nothing material to report, add or draw attention to in respect of these matters.

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Independent Auditor’s report to the members of Severn Trent Plc continued

Principal risks and viability statement Based solely on reading the Directors’ statements and considering whether they were consistent with the knowledge we obtained in the course of the audit, including the knowledge obtained in the evaluation of the Directors’ assessment of the Group’s and the Company’s ability to continue as a going concern, we are required to state whether we have anything material to add or draw attention to in relation to: • the disclosures on pages 56 to 61 that describe the principal risks and explain how they are being managed or mitigated; • the Directors’ confirmation on page 56 that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity; or • the Directors’ explanation on pages 62 and 63 as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. We are also required to report whether the Directors’ statement relating to the prospects of the Group required by Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit. We confirm that we have nothing material to report, add or draw attention to in respect of these matters. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Valuation of the provision for trade receivables in Severn Trent Water Limited Key audit matter A portion of household customers do not or cannot pay their bills which results in the need for provisions to be made description for non-payment of the customer balance. Management makes estimates regarding the expected future loss rate when calculating the bad debt provision. The provision for trade receivables as at 31 March 2019 was £115.2 million (31 March 2018: £124.5 million). Changes have been made to the basis of estimation of the bad debt provision for the year ended 31 March 2019 as a result of the adoption of IFRS 9 Financial Instruments. Provisions are made against Severn Trent Water Limited’s trade receivables based on historical cash collection rates of debt now aged over seven years, which is considered by management to be representative of collection risk on the whole population of household debtors. The key audit matter, which is also a potential fraud risk, has been focused on the valuation of the household bad debt provision, specifically cash collection reflected in the model for debt aged greater than seven years. The Audit Committee also considered this as a significant issue as discussed in the Audit Committee report on page 88. The provision for trade receivables is discussed in note 2 p) and 21 to the Group financial statements. How the scope of our We have audited and critically reviewed the assumptions used in the calculation of the bad debt provision as follows: audit responded to • assessed the design and implementation of key management review controls over the bad debt provision model; the key audit matter • assessed the allocation of cash collected on years seven to ten debt to ensure that it has not inappropriately been allocated to this ageing bucket to reduce the overall provisioning rate; • reviewed management’s assumptions applied to the provision for trade receivables and challenged whether they reflect the lifetime expected credit loss applied to trade receivables, including a review of cash collection trends, demographic and economic trends; and • reconciled the debtor ageing for each debt category to source data. Key observations We are satisfied that the assumptions applied in assessing the overall bad debt provision are reasonable and we consider changes to the basis of estimation of the bad debt provision to be appropriate.

Valuation of the Group’s retirement benefit obligation Key audit matter Valuation of retirement benefit obligations is an area involving significant estimation because the process is complex description and requires management (after taking advice from their actuarial advisers) to make a number of assumptions concerning the discount rate, inflation rate, pension increases, and the longevity of current pensioners in order to determine the value of the schemes’ liabilities. The key audit matter is focused on the valuation of the pension scheme liabilities and the appropriateness of the actuarial assumptions that are used to calculate it, specifically with reference to the discount rate. The Group’s retirement benefit obligation as at 31 March 2019 is £452.9 million (31 March 2018: £519.8 million) as per note 28 Retirement benefit schemes. The Audit Committee also considered this as a significant issue as discussed in the Audit Committee report on page 89. Management has included this as a key source of estimation uncertainty in note 4 to the Group financial statements. How the scope of our We have challenged the assumptions applied by performing the following procedures: audit responded to • evaluated the design and implementation of management’s key control; the key audit matter • with the support of our pension specialists within our audit team, we challenged the assumptions used in the calculation of the pension scheme deficit as detailed in note 28 specifically challenging the discount rate with reference to comparable market and other third party data; and • assessed whether there had been any changes in the methodology to determine the assumptions since the prior year. Key observations We are satisfied that management’s assumptions in the valuation of the retirement benefit obligation are appropriate with consistent valuation methodology to previous periods.

130 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance > Group financial statements Company financial statements Other information

Classification and valuation of capital expenditure in Severn Trent Water Limited Key audit matter Severn Trent Water Limited has a substantial capital programme which has been agreed with the regulator (Ofwat) description and therefore incurs significant expenditure in relation to the development and maintenance of both infrastructure and non-infrastructure assets. Severn Trent Water Limited property, plant and equipment (“PPE”) external additions in the year were £838.2 million (2018: £663.2 million) of the total additions of £861.4 million (2018: £691.2 million) disclosed in note 18. As the classification of capital expenditure, operating expenditure and infrastructure renewals expenditure directly affects the Group’s reported financial performance, we identified a key audit matter relating to an overstatement of capital expenditure, whether caused by changing the Group’s capex implementation guidance and/or incorrect application of this guidance. Due to the level of judgment involved, we have determined that there was a potential for fraud through possible manipulation of this balance. The Audit Committee also considered this a significant issue as discussed in the Audit Committee report on page 88. Management has included this as a key source of estimation uncertainty in note 4 to the financial statements. How the scope of our We performed the following procedures to respond to the key audit matter: audit responded to • reviewed Severn Trent Water Limited’s capitalisation policy and implementation guidance to understand any changes the key audit matter in the current year and to determine compliance with the relevant accounting standards; • evaluated the design and implementation and operating effectiveness of controls over the application of the policy to expenditure incurred on projects within the Group’s capital programme during the year; • tested whether there have been any changes in the application of the policy; and • for a sample of capital projects, assessed the application of the capitalisation policy to the costs incurred by reviewing the business cases and invoices and obtained further explanations and evidence for significant changes in capital expenditure from budget. Key observations We are satisfied that the classification and valuation of assets capitalised in the year is appropriate.

Our application of materiality We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work. Based on our professional judgment, we determined materiality for the financial statements as a whole as follows:

Group financial statements Parent company financial statements Materiality £18 million (2018: £18 million) £16.2 million (2018: £16.2 million) Basis for determining Approximately 4.8% (2018: approximately 5.6%) of profit before 3.0% of net assets (2018: 3.0%) capped at 90% of materiality tax, exceptional items and fair value movements in derivative Group materiality. financial instruments. Whilst underlying profit has increased, the business has not changed significantly and therefore materiality has been retained at £18 million. Rationale for the As in 2018, profit before tax, gains/losses on financial The parent company does not trade or exist for benchmark applied instruments and exceptional items has been used in order profit generating purposes so materiality has been to focus on the Group’s underlying trading performance determined using net assets. consistent with the Group’s internal and external reporting.

Proﬁt before tax, exceptional items and fair value movements in derivatives £378.3 million Group materiality £18.0 million We agreed with the Audit Committee that we would report to the Committee all audit differences in excess Component materiality range of £750,000 (2018: £750,000), as well as differences £16.2 million to £0.03 million below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of Audit Committee reporting the financial statements. threshold £0.75 million

Proﬁt before tax, exceptional items and fair value movements in derivatives

An overview of the scope of our audit Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide controls, and assessing the risks of material misstatement at the Group level. Regulated Water and Waste Water is primarily comprised of Severn Trent Water Limited and Hafren Dyfrdwy Cyfyngedig which were subject to a full scope audit using a materiality of £15 million and £0.6 million respectively (2018: £15 million and £0.4 million). We have audited a further nine components using statutory materialities which range from £34,000 to £9 million (2018: ten components using statutory materialities which ranged from £44,000 to £9 million). Audit work to respond to the risks of material misstatement was performed directly by the Group audit engagement team. This represents over 95% (2018: over 90%) of the Group’s net operating assets and profit before tax, gains/losses on financial instruments and exceptional items.

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Independent Auditor’s report to the members of Severn Trent Plc continued

At the parent entity level we also tested the consolidation process and carried out analytical procedures to confirm our conclusion that there were no significant risks of material misstatement of the aggregated financial information of the remaining components not subject to full scope audit procedures. Other information The Directors are responsible for the other information. The other information comprises the information included in the annual report, other than the financial statements and our Auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. In this context, matters that we are specifically required to report to you as uncorrected material misstatements of the other information include where we conclude that: • fair, balanced and understandable – the statement given by the Directors that they consider the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or • Audit Committee reporting – the section describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee; or • Directors’ statement of compliance with the UK Corporate Governance Code – the parts of the Directors’ statement required under the Listing Rules relating to the Company’s compliance with the UK Corporate Governance Code containing provisions specified for review by the Auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code. We have nothing to report in respect of these matters. Responsibilities of Directors As explained more fully in the Directors’ responsibilities statement, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Directors are responsible for assessing the Group’s and the parent company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an Auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. Details of the extent to which the audit was considered capable of detecting irregularities, including fraud are set out below. A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our Auditor’s report. Extent to which the audit was considered capable of detecting irregularities, including fraud We identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and then design and perform audit procedures responsive to those risks, including obtaining audit evidence that is sufficient and appropriate to provide a basis for our opinion. Identifying and assessing potential risks related to irregularities In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance with laws and regulations, our procedures included the following: • enquiring of management, internal audit and the Audit Committee, including obtaining and reviewing supporting documentation, concerning the Group’s policies and procedures relating to: – identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non-compliance; – detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud; – the internal controls established to mitigate risks related to fraud or non-compliance with laws and regulations; • discussing among the engagement team and involving relevant internal specialists, including tax, valuations, pensions, IT, and financial instruments regarding how and where fraud might occur in the financial statements and any potential indicators of fraud. As part of this discussion, we identified potential for fraud in the following areas: valuation of the provision for trade receivables in Severn Trent Water Limited, classification and valuation of capital expenditure in Severn Trent Water Limited, and accuracy of wholesale revenue for wholesale customers in the non-household retail market; and • obtaining an understanding of the legal and regulatory framework that the Group operates in, focusing on those laws and regulations that had a direct effect on the financial statements or that had a fundamental effect on the operations of the Group. The key laws and regulations we considered in this context included the UK Companies Act, Listing Rules, pensions legislation and tax legislation.

132 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance > Group financial statements Company financial statements Other information

Audit response to risks identified As a result of performing the above, we identified valuation of the provision for trade receivables in Severn Trent Water Limited and, classification and valuation of capital expenditure in Severn Trent Water Limited as key audit matters. The key audit matters section of our report explains the matters in more detail and also describes the specific procedures we performed in response to those key audit matters. Accuracy of wholesale revenue for wholesale customers in the non-household retail market has remained a significant risk due to fraud whilst no longer being a key audit matter. In response to the risk identified, we have: • evaluated the design and implementation of key management controls around the accuracy of the wholesale revenue for wholesale customers in the non-household market; • performed an analytical review of total wholesale revenue by calculating an expectation based on prior year revenue, adjusted for tariff changes; • completed substantive testing of the consumption uplift model in order to obtain assurance over the accuracy and completeness of the MOSL data populated within the model; and • challenged whether the refinements to the model, including removing the adjustment relating to large and intermediate customers, are appropriate. In addition to the above, our procedures to respond to risks identified included the following: • reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with relevant laws and regulations discussed above; • enquiring of management, the Audit Committee and in-house legal counsel concerning actual and potential litigation and claims; • performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement due to fraud; • reading minutes of meetings of those charged with governance, reviewing internal audit reports and reviewing correspondence with regulatory authorities; and • in addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries and other adjustments; assessing whether the judgments made in making accounting estimates are indicative of a potential bias; and evaluating the business rationale of any significant transactions that are unusual or outside the normal course of business. We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members including internal specialists, and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit. Report on other legal and regulatory requirements Opinions on other matters prescribed by the Companies Act 2006 In our opinion the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006. In our opinion, based on the work undertaken in the course of the audit: • the information given in the Strategic report and the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and • the Strategic report and the Directors’ report have been prepared in accordance with applicable legal requirements. In the light of the knowledge and understanding of the Group and of the parent company and their environment obtained in the course of the audit, we have not identified any material misstatements in the Strategic report or the Directors’ report. Matters on which we are required to report by exception Adequacy of explanations received and accounting records Under the Companies Act 2006 we are required to report to you if, in our opinion: • we have not received all the information and explanations we require for our audit; or • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company financial statements are not in agreement with the accounting records and returns. We have nothing to report in respect of these matters. Directors’ remuneration Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of Directors’ remuneration have not been made or the part of the Directors’ remuneration report to be audited is not in agreement with the accounting records and returns. We have nothing to report in respect of these matters. Other matters Auditor tenure Following the recommendation of the Audit Committee, we were appointed by the Company at its Annual General Meeting on 26 July 2005 to audit the financial statements for the year ending 31 March 2006 and subsequent financial periods. The period of total uninterrupted engagement including previous renewals and reappointments of the firm is 14 years, covering the years ending 31 March 2006 to 31 March 2019. Consistency of the audit report with the additional report to the Audit Committee Our audit opinion is consistent with the additional report to the Audit Committee we are required to provide in accordance with ISAs (UK). Use of our report This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an Auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Kari Hale, ACA (Senior statutory auditor) For and on behalf of Deloitte LLP Statutory Auditor London, United Kingdom 20 May 2019

Severn Trent Plc Annual Report and Accounts 2019 133 Group financial statements

Consolidated income statement For the year ended 31 March 2019

2019 2018 (restated see note 2 a) Note £m £m Turnover 5,6 1,767.4 1,696.4 Other income 19.9 3.9 Operating costs before charge for bad and doubtful debts, amortisation of acquired intangible assets and exceptional items (1,188.1) (1,134.7) Charge for bad and doubtful debts (25.6) (25.8) Operating costs before amortisation of acquired intangible assets and exceptional items (1,213.7) (1,160.5) Amortisation of acquired intangible assets (0.7) – Exceptional items 8 (9.6) (12.6) Total operating costs (1,224.0) (1,173.1) Profit before interest, tax, amortisation of acquired intangible assets and exceptional items 573.6 539.8 Amortisation of acquired intangible assets (0.7) – Exceptional items 8 (9.6) (12.6) Profit before interest and tax 563.3 527.2 Finance income 10 68.9 67.7 Finance costs 11 (263.1) (287.2) Net finance costs (194.2) (219.5) Net gains/(losses) on financial instruments 12 16.0 (6.7) Share of net (loss)/profit of joint ventures accounted for using the equity method 19 (0.4) 0.2 Profit on ordinary activities before taxation 384.7 301.2 Current tax 13 (31.8) (32.9) Deferred tax 13 (37.6) (28.7) Taxation on profit on ordinary activities 13 (69.4) (61.6) Profit for the year from continuing operations 315.3 239.6 Profit for the year from discontinued operations – 13.2 Profit for the year 315.3 252.8

Earnings per share (pence)

2019 2018 Note (restated) From continuing operations Basic 15 133.4 101.8 Diluted 15 133.2 101.5 From continuing and discontinued operations Basic 15 133.4 107.4 Diluted 15 133.2 107.1

134 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance > Group financial statements Company financial statements Consolidated statement of comprehensive income Other information For the year ended 31 March 2019

2019 2018 (restated see note 2 a) £m £m Profit for the year 315.3 252.8 Other comprehensive income/(loss) Items that will not be reclassified to the income statement: Net actuarial gains 57.9 29.1 Tax on net actuarial gains (9.8) (7.6) 48.1 21.5 Items that may be reclassified to the income statement: (Losses)/gains on cash flow hedges (8.6) 5.8 Deferred tax on losses/gains on cash flow hedges 1.5 (1.0) Amounts on cash flow hedges transferred to the income statement 8.2 8.2 Deferred tax on transfer to the income statement (1.3) (1.4) Exchange movement on translation of overseas results and net assets – (1.6) Cumulative exchange gains taken to the income statement – (29.8) (0.2) (19.8) Other comprehensive income for the year 47.9 1.7 Total comprehensive income for the year 363.2 254.5

Severn Trent Plc Annual Report and Accounts 2019 135 Group financial statements

Consolidated statement of changes in equity For the year ended 31 March 2019

Equity attributable to owners of the company Share Share Other Retained capital premium reserves earnings Total £m £m £m £m £m As at 1 April 2017 as previously reported 234.7 112.5 121.8 454.3 923.3 Restatement – – – 4.1 4.1 As at 1 April 2017 restated 234.7 112.5 121.8 458.4 927.4 Profit for the year – – – 252.8 252.8 Gains on cash flow hedges – – 5.8 – 5.8 Deferred tax on gains on cash flow hedges – – (1.0) – (1.0) Amounts on cash flow hedges transferred to the income statement – – 8.2 – 8.2 Deferred tax on transfer to the income statement – – (1.4) – (1.4) Exchange movement on translation of overseas results and net assets – – (1.6) – (1.6) Cumulative exchange gains transferred to income statement – – (29.8) – (29.8) Net actuarial gains – – – 29.1 29.1 Tax on net actuarial gains – – – (7.6) (7.6) Transfer between reserves – – (9.0) 9.0 – Total comprehensive income/(loss) for the year – – (28.8) 283.3 254.5 Share options and LTIPs – proceeds from shares issued 0.4 5.2 – – 5.6 – value of employees’ services – – – 6.9 6.9 Current tax on share based payments – – – 0.8 0.8 Deferred tax on share based payments – – – (1.3) (1.3) Dividends paid – – – (197.0) (197.0) As at 31 March 2018 restated 235.1 117.7 93.0 551.1 996.9

As at 1 April 2018 as previously reported 235.1 117.7 93.0 547.9 993.7 Restatement (see note 2 a) – – – 3.2 3.2 As at 1 April 2018 restated 235.1 117.7 93.0 551.1 996.9 Profit for the year – – – 315.3 315.3 Losses on cash flow hedges – – (8.6) – (8.6) Deferred tax on losses on cash flow hedges – – 1.5 – 1.5 Amounts on cash flow hedges transferred to the income statement – – 8.2 – 8.2 Deferred tax on transfer to the income statement – – (1.3) – (1.3) Net actuarial gains – – – 57.9 57.9 Tax on net actuarial gains – – – (12.2) (12.2) Total comprehensive income/(loss) for the year – – (0.2) 361.0 360.8 Share options and LTIPs – proceeds from shares issued 0.8 10.3 – – 11.1 – value of employees' services – – – 8.1 8.1 – own shares purchased – – – (1.1) (1.1) Current tax on share based payments – – – 0.2 0.2 Dividends paid – – – (211.9) (211.9) As at 31 March 2019 235.9 128.0 92.8 707.4 1,164.1

136 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance > Group financial statements Company financial statements Consolidated balance sheet Other information At 31 March 2019

2019 2018 (restated see note 2 a) Note £m £m Non-current assets Goodwill 16 90.9 62.2 Other intangible assets 17 124.2 88.4 Property, plant and equipment 18 9,085.6 8,471.9 Investments in joint ventures 19 37.0 37.6 Derivative financial instruments 20 68.4 36.0 Trade and other receivables 21 204.0 185.3 Retirement benefit surplus 28 18.6 18.2 9,628.7 8,899.6 Current assets Inventory 20.8 18.5 Trade and other receivables 21 513.5 456.4 Derivative financial instruments 20 0.1 0.2 Cash and cash equivalents 22 41.0 51.1 575.4 526.2 Current liabilities Borrowings 23 (197.0) (308.7) Trade and other payables 26 (496.7) (462.6) Current tax payable (9.3) (8.6) Provisions for liabilities 29 (32.2) (40.6) (735.2) (820.5) Net-current liabilities (159.8) (294.3) Non-current liabilities Borrowings 23 (5,857.2) (5,259.1) Derivative financial instruments 25 (126.5) (116.0) Trade and other payables 26 (1,082.9) (1,009.4) Deferred tax 27 (747.5) (675.2) Retirement benefit obligations 28 (471.5) (538.0) Provisions for liabilities 29 (19.2) (10.7) (8,304.8) (7,608.4) Net assets 1,164.1 996.9 Equity Called up share capital 30 235.9 235.1 Share premium account 31 128.0 117.7 Other reserves 32 92.8 93.0 Retained earnings 707.4 551.1 Total equity 1,164.1 996.9

Signed on behalf of the Board who approved the accounts on 20 May 2019.

Andrew Duff James Bowling Chairman Chief Financial Officer

Company Number 02366619

Severn Trent Plc Annual Report and Accounts 2019 137 Group financial statements

Consolidated cash flow statement For the year ended 31 March 2019

2019 2018 Note £m £m Cash generated from operations 40 826.3 773.3 Tax received 40 – 8.0 Tax paid 40 (21.3) (14.5) Net cash generated from operating activities 805.0 766.8 Cash flows from investing activities Purchase of subsidiaries net of cash acquired 38 (50.9) (0.2) Investments in associates and joint ventures (6.2) – Purchases of property, plant and equipment (782.1) (608.5) Purchases of intangible assets and goodwill (35.1) (27.3) Contributions and grants received 46.5 36.8 Proceeds on disposal of subsidiaries net of cash disposed 39 – 25.1 Proceeds on disposal of property, plant and equipment 1.4 8.0 Net loans advanced to joint ventures and associates – (26.6) Interest received 0.8 6.4 Net cash from investing activities (825.6) (586.3) Cash flow from financing activities Interest paid (158.0) (183.4) Interest element of finance lease payments (4.4) (5.1) Dividends paid to shareholders of the parent (211.9) (197.0) Repayments of borrowings (166.5) (552.6) Repayments of obligations under finance leases (1.7) (1.8) New loans raised 554.2 789.2 Issues of shares 11.1 5.6 Swap termination payment – (40.0) Purchase of own shares (1.1) – Net cash flow from financing activities 21.7 (185.1) Net movement in cash and cash equivalents 1.1 (4.6) Net cash and cash equivalents at the beginning of the year 38.5 44.6 Effect of foreign exchange rates – (1.5) Net cash and cash equivalents at end of year 39.6 38.5 Cash and cash equivalents 22 41.0 34.7 Bank overdrafts (1.4) (12.6) Short-term deposits – 16.4 39.6 38.5

138 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance > Group financial statements Company financial statements Notes to Group financial statements Other information For the year ended 31 March 2019

1. General information The key accounting policies for the Group and the parent company are set out below and have been applied consistently The Severn Trent Group has a number of operations. These are except where indicated. Where policies are specific to the described in the segmental analysis in note 5. Group or to the Company this is set out in the relevant policy. Severn Trent Plc is a company incorporated and domiciled in the United Kingdom. The address of its registered office (iii) Changes in accounting policies – IFRS 9 and IFRS 15 is shown on the back of the cover of the Annual Report In the current financial year the Group has adopted IFRS 9 and Accounts. Financial Instruments and IFRS 15 Revenue from Contracts with Customers. Severn Trent Plc is listed on the London Stock Exchange. The adoption of IFRS 9 has not resulted in any significant 2. Accounting policies changes to the Group’s existing accounting practices for financial instruments. a) Basis of preparation IFRS 9 affects the Group’s measurement and disclosure The financial statements for the Group and the parent company of financial instruments with effect from 1 April 2018. have been prepared on the going concern basis (see Strategic The classification of its financial assets and liabilities has not report on page 16) under the historical cost convention as changed significantly as a result of the adoption of IFRS 9. modified by the revaluation of certain financial assets and The Group has not retrospectively applied the hedge accounting liabilities at fair value. criteria of IFRS 9 to hedging relationships established (i) Consolidated financial statements under IAS 39 accounting. Existing hedges that qualify for hedge accounting under IAS 39 continue to qualify for hedge The consolidated financial statements have been prepared in accounting under IFRS 9. For new hedges established following accordance with International Financial Reporting Standards adoption of IFRS 9 the Group will determine on a case-by- (‘IFRS’), International Accounting Standards (‘IAS’) and case basis whether to apply the hedge accounting provisions IFRIC interpretations issued and effective and ratified by the of IFRS 9. European Union as at 31 March 2019. Provisions against trade receivables were calculated under (ii) Parent company financial statements the previous accounting policy using historical collection The parent company financial statements have been prepared information and losses expected as a result of future events in accordance with United Kingdom Accounting Standards and were not recognised. Under IFRS 9 the Group recognises comply with the Companies Act 2006. The Company meets a provision for the lifetime expected credit losses for trade the definition of a qualifying entity as defined in FRS 100 receivables. The bad debt charge or provision is not materially ‘Application of Financial Reporting Requirements’, accordingly different as a result. the Company has elected to apply FRS 101 ‘Reduced Disclosure Framework’. The Group has elected to restate comparative information for prior periods upon adoption of IFRS 15. Therefore, the recognition and measurement requirements of EU-adopted IFRS have been applied, with amendments The core principle of IFRS 15 is that an entity should recognise where necessary in order to comply with Companies Act 2006 revenue from the transfer of promised goods or services to and The Large and Medium-sized Companies and Groups customers in an amount that reflects the consideration the (Accounts and Reports) Regulations 2008 (SI 2008/410) as entity expects to be entitled to in exchange for those goods and the parent company financial statements are Companies Act services. The impact of the adoption of IFRS 15 on the Group’s 2006 accounts. segments is set out below. As permitted by FRS 101, the parent company has taken Regulated Water and Waste Water advantage of the disclosure exemptions available under There was no change to the recognition of revenue from that standard in relation to statement of cash flows, share charges for water or waste water services. The policy for based payment, financial instruments, capital management, recognition of charges for water and waste water services is presentation of comparative information in respect of set out in note 2 c). The performance obligations are satisfied certain assets, standards not yet effective and related party by the provision of water and waste water services and this transactions. Where required, equivalent disclosures are given was also the basis for recognising revenue under the previous in the consolidated financial statements. accounting standard. As permitted by Section 408 of the Companies Act 2006, no There was no change to the recognition of contributions from profit or loss account or cash flow statement is presented for developers. The policy for recognition of contributions from the parent company. The profit for the year is disclosed in the developers is set out in note 2 k). The performance obligations statement of comprehensive income, the statement of changes for this income are satisfied through the ongoing supply of in equity and the balance sheet. water and waste water services to the relevant property and this was also the basis for recognising revenue under the Severn Trent Plc is a partner in Severn Trent Limited previous accounting standard. Partnership and Severn Trent 2017 Limited Partnership (‘the partnerships’), which are registered in Scotland. As the partnerships are included in the consolidated accounts, the parent company has taken advantage of the exemption conferred by Regulation 7 of The Partnership (Accounts) Regulations 2008 from the requirements of Regulations 4 to 6.

Severn Trent Plc Annual Report and Accounts 2019 139 Group financial statements

Notes to Group financial statements continued For the year ended 31 March 2019

2. Accounting policies continued Under IFRS 15, the expected revenue over the life of the contract is allocated to the performance obligations based on a) Basis of preparation continued an expected margin for each performance obligation over the (iii) Changes in accounting policies – IFRS 9 and IFRS 15 life of the contract under the following headings: continued • operating and maintaining the MOD infrastructure assets; Business Services • upgrading the MOD infrastructure assets; The Operating Services business operates under a series of bespoke contracts with specific performance obligations. • administrating the services received from statutory water The Group applied the methodology set out in IFRS 15 to each of and sewerage undertakers; and these contracts in order to identify differences from the previous • administrating billing services of the MOD’s commercial and accounting policy. The most significant differences arose in Non Base Dependent customers. relation to the Group’s contract to provide water and waste water services to the Ministry of Defence (MOD). The Group acts as the Revenue is recognised in line with the delivery of each service provider under the MOD Project Aquatrine Package C – a performance obligation. The expected whole-life revenues and 25 year contract spanning 1,295 sites across England covering costs on the contract are updated regularly. Any changes to the eastern sea border and from Lancashire in the North West to revenue relating to performance obligations already delivered West Sussex on the South coast. are recognised in the period in which they are identified. Under this contract the Group maintains and upgrades the MOD The previous accounting policy for this contract was to recognise infrastructure assets and provides operating services for water revenue billed under the volumetric tariff at the point of billing. and waste water. Both the operating services and maintenance The expected costs for the upgrade services were recognised on and upgrade services are charged under a volumetric tariff, a straight line basis, before adjusting for expected inflation, over along with standing charges, which are adjusted with inflation the life of the contract. The resulting asset was recognised as a as agreed in the contract. financial asset in accordance with IFRIC 12. The tables below show the effect of the IFRS 15 adoption on the income statement, balance sheet and earnings per share for the year ended 31 March 2018. Consolidated income statement (extract) Year ended 31 March 2018 As previously IFRS 15 reported impact Restated £m £m £m Turnover 1,694.1 2.3 1,696.4 Operating costs (1,165.7) (3.5) (1,169.2) Profit before interest and tax 528.4 (1.2) 527.2 Net finance costs, losses on financial instruments and results of joint ventures (226.0) – (226.0) Profit on ordinary activities before taxation 302.4 (1.2) 301.2 Taxation on profit on ordinary activities (61.9) 0.3 (61.6) Profit for the period from continuing operations 240.5 (0.9) 239.6

Earnings per share Year ended 31 March 2018 As previously IFRS 15 reported impact Restated pence pence pence Underlying earnings per share (see note 15) Underlying basic earnings per share 121.0 (0.5) 120.5 Underlying diluted earnings per share 120.6 (0.5) 120.1 Earnings per share from continuing operations Basic earnings per share 102.2 (0.4) 101.8 Diluted earnings per share 101.9 (0.4) 101.5 Earnings per share from continuing and discontinued operations Basic earnings per share 107.8 (0.4) 107.4 Diluted earnings per share 107.5 (0.4) 107.1

Consolidated balance sheet (extract) As at 31 March 2018 As previously IFRS 15 reported impact Restated £m £m £m Non-current trade and other receivables 181.3 4.0 185.3 Deferred tax (674.4) (0.8) (675.2) Retained earnings 547.9 3.2 551.1

140 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance > Group financial statements Company financial statements Other information

2. Accounting policies continued Renewable energy revenue includes sales of electricity and gas and the related green energy incentives. Revenue from energy b) Basis of consolidation sales is recognised when the electricity or gas is delivered to The consolidated financial statements include the results the national grid. Green energy incentives are recognised when of Severn Trent Plc and its subsidiaries and joint ventures. the Group becomes entitled to them. Results are included from the date of acquisition or Interest income is accrued on a time basis by reference incorporation and are excluded from the date of disposal. to the principal outstanding and at the effective interest Subsidiaries are consolidated where the Group has the power rate applicable. to control a subsidiary. d) Exceptional items Joint venture undertakings are accounted for on an equity Exceptional items are income or expenditure, which individually basis where the Group exercised joint control under a or, if of a similar type, in aggregate should, in the opinion of contractual arrangement. the Directors, be disclosed by virtue of their size or nature if Non-controlling interests in the net assets of subsidiaries are the financial statements are to give a true and fair view. In this identified separately from the Group’s equity. Non-controlling context, materiality is assessed at the segment level. interests consist of the amount of those interests at the date of the original business combination and the non-controlling e) Taxation interests’ share of changes in equity since that date. Current tax payable is based on taxable profit for the year and is calculated using tax rates that have been enacted or Transactions between the Company and its subsidiaries have substantively enacted by the balance sheet date. been eliminated on consolidation and are not included within the Group financial statements. Deferred taxation is provided in full on taxable temporary differences between the tax bases of assets and liabilities Foreign currency denominated assets and liabilities of the and their carrying amounts in the financial statements. Company and its subsidiary undertakings are translated into Deferred taxation is measured on a non-discounted basis using the relevant functional currency at the rates of exchange ruling the tax rates and laws that have been enacted or substantively at the year end. Any exchange differences so arising are dealt enacted by the balance sheet date and are expected to apply with through the income statement. when the related deferred income tax asset is realised or the Foreign currency transactions arising during the year deferred tax liability is settled. are translated into sterling at the rate of exchange ruling Current and deferred tax are recognised in profit or loss, on the date of the transaction. All gains and losses on except where they relate to items that are recognised in other exchange arising during the year are dealt with through the comprehensive income or directly in equity, in which case, income statement. the current and deferred tax are also recognised in other comprehensive income or directly in equity, respectively. c) Revenue recognition Where current tax or deferred tax arises from the initial Revenue includes turnover and interest income. accounting for a business combination, the tax effect is Turnover represents the fair value of consideration receivable, included in the accounting for the business combination. excluding value added tax, trade discounts and inter-company A deferred tax asset is only recognised to the extent it is sales, in the ordinary course of business for goods and probable that sufficient taxable profits will be available in the services provided. future to utilise it. Turnover is not recognised until the service has been provided Deferred tax assets and liabilities are offset when there is a to the customer or the goods to which the sale relates have legally enforceable right to set off current tax assets against either been despatched to the customer or, where they are held current tax liabilities. on the customer’s behalf, title has passed to the customer and it is probable that it will be received. f) Goodwill Water and waste water revenue is recognised when the service Goodwill represents the excess of the fair value of purchase is provided and includes an estimate of the amount of mains consideration over the fair value of the net assets acquired. water and waste water charges unbilled at the year end. Goodwill arising on acquisition of subsidiaries is included The accrual is estimated using a defined methodology based in intangible assets, whilst goodwill arising on acquisition upon a measure of unbilled water consumed by tariff, which is of associates or joint ventures is included in interests in calculated from historical billing information. associates or joint ventures respectively. If an acquisition gives rise to negative goodwill this is credited directly to the Operating services revenue is recognised in line with the income statement. Fair value adjustments based on provisional delivery of each performance obligation. Further details estimates are amended within one year of the acquisition, if of the performance obligations are detailed in note 2 a(iii). required, with a corresponding adjustment to goodwill. The expected turnover over the life of a contract is allocated to each performance obligation based on the expected margin Goodwill arising on all acquisitions prior to 1 April 1998 was for each obligation. Any changes to the revenue relating to written off to reserves under UK GAAP and remains eliminated performance obligations already delivered are recognised in against reserves. Following the disposal of the US Operating the period in which they are identified. Differences between Services business on 30 June 2017, all acquisitions prior to amounts recognised as revenue and amounts billed are 1 April 1998 that were included in goodwill have now been sold. recognised as contract assets or liabilities. Purchased goodwill arising on acquisitions of subsidiaries after 31 March 1998 is treated as an intangible fixed asset.

Severn Trent Plc Annual Report and Accounts 2019 141 Group financial statements

Notes to Group financial statements continued For the year ended 31 March 2019

2. Accounting policies continued The costs of like-for-like replacement of infrastructure components are recognised in the income statement as f) Goodwill continued they arise. Expenditure which results in enhancements Goodwill and indefinite life intangibles are tested for to the operating capability of the infrastructure networks impairment in accordance with the policy set out in note 2 l) is capitalised. below and carried at cost less accumulated impairment losses. Where items of property, plant and equipment are transferred Goodwill is allocated to the cash-generating unit that derives to the Group from customers or developers, the fair value of the benefit from the goodwill for impairment testing purposes. asset transferred is recognised in the balance sheet. Fair value Where goodwill forms part of a cash-generating unit and all is determined based on estimated depreciated replacement or part of that unit is disposed of, the associated goodwill cost. Where the transfer is in exchange for connection to the is included in the carrying amount of that operation when network and there is no further obligation, the corresponding determining the gain or loss on disposal of the operation. credit is recognised immediately in turnover. Where the transfer is considered to be linked to the provision of ongoing g) Other intangible non-current assets services the corresponding credit is recorded in deferred Intangible assets acquired separately are capitalised at cost. income and released to operating costs over the expected Following initial recognition, finite life intangible assets are useful lives of the related assets. amortised on a straight-line basis over their estimated useful Where assets take a substantial period of time to get ready for economic lives as follows: their intended use, the borrowing costs directly attributable to Years the acquisition, construction or production of these assets are Software 3 – 10 added to their cost. Other intangible assets 15 Property, plant and equipment is depreciated, using the Amortisation charged on intangible assets is taken to the straight-line method, to its estimated residual value over its income statement through operating costs. estimated useful life, with the exception of freehold land which is not depreciated. Assets in the course of construction are not Finite life intangible assets are reviewed for impairment where depreciated until commissioned. indicators of impairment exist (see 2 l) below). The estimated useful lives are: Intangible assets with indefinite useful lives are carried Years at cost less accumulated impairment losses. Such assets Infrastructure assets are reviewed for impairment at least annually and where Impounding reservoirs 250 indications of impairment exist. Raw water aqueducts 250 Development expenditure is capitalised as an intangible asset Mains 80 – 150 and written off over its expected useful economic life where the Sewers 150 – 200 following criteria are met: Other assets • it is technically feasible to create and make the asset Buildings 30 – 80 available for use or sale; Fixed plant and equipment 20 – 40 • there are adequate resources available to complete the Vehicles and mobile plant 2–15 development and to use or sell the asset; j) Leased assets • there is the intention and ability to use or sell the asset; Leases where the Group obtains assets that transfer • it is probable that the asset created will generate future substantially all the risks and rewards of ownership to economic benefits; and the Group are treated as finance leases. The lower of the • the development costs can be measured reliably. fair value of the leased asset or the present value of the minimum lease payments is capitalised as an asset with a Research expenditure is expensed when it is incurred. corresponding liability representing the obligation to the lessor. Lease payments are treated as consisting of a capital h) Pre-contract costs element and a finance charge; the capital element reduces Incremental costs incurred in obtaining contracts with the obligation to the lessor and the finance charge is written customers are recognised as a prepayment and written off to off to the income statement at a constant rate over the period the income statement over the life of the contract where it is of the lease in proportion to the capital amount outstanding. expected that the costs will be recovered. Depreciation is charged over the shorter of the estimated All other costs of obtaining contracts are written off to the useful life and the lease period. income statement as incurred. Leases where substantially all the risks and rewards of ownership remain with the lessor are classified as operating i) Property, plant and equipment leases. Rental costs arising under operating leases are Property, plant and equipment is held at cost (or at deemed expensed on a straight line basis over the term of the lease. cost for infrastructure assets on transition to IFRS) less Leases of land are normally treated as operating leases, unless accumulated depreciation and impairment. Expenditure on ownership is transferred to the Group at the end of the lease. property, plant and equipment relating to research and development projects is capitalised and depreciated over the expected useful life of those assets.

142 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance > Group financial statements Company financial statements Other information

2. Accounting policies continued o) Loans receivable Loans receivable are measured at fair value on initial k) Grants and contributions recognition, less issue fee income received. After initial Grants and contributions received in respect of non-current recognition, loans receivable are subsequently measured assets, including certain charges made as a result of new at amortised cost using the effective interest rate method connections to the water and sewerage networks, are treated whereby interest and issue fee income are credited to as deferred income and released to operating costs over the the income statement and added to the carrying value of useful economic life of those non-current assets. loans receivable at a constant rate in proportion to the loan Grants and contributions, which are given in compensation amount outstanding. for expenses incurred with no future related costs, are p) Trade receivables and accrued income recognised in operating costs in the period that they Trade receivables and accrued income are measured at fair become receivable. value on initial recognition. If there is objective evidence that l) Impairment of non-current assets the asset is impaired, it is written down to its recoverable If the recoverable amount of goodwill, an item of property, plant amount and the irrecoverable amount is recognised as an and equipment, or any other non-current asset is estimated expense in operating costs. to be less than its carrying amount, the carrying amount of The Group applies the simplified approach permitted by the asset is reduced to its recoverable amount. Where the IFRS 9 for estimating expected credit losses on trade asset does not generate cash flows that are independent from receivables. For trade receivables that are assessed not to other assets, the Group estimates the recoverable amount be impaired individually, expected credit losses are estimated of the cash-generating unit to which the asset belongs. based on the Group’s historical experience of trade receivable Recoverable amount is the higher of fair value less costs to sell write-offs. or estimated value in use at the date the impairment review is undertaken. Fair value less costs to sell represents the q) Retirement benefits amount obtainable from the sale of the asset in an arm’s length (i) Defined benefit schemes transaction between knowledgeable and willing third parties, The difference between the value of defined benefit pension less costs of disposal. Value in use represents the present scheme assets and defined benefit pension scheme liabilities value of future cash flows expected to be derived from a is recorded on the balance sheet as a retirement benefit asset cash-generating unit, discounted using a pre-tax discount or obligation. rate that reflects current market assessments of the cost of capital of the cash-generating unit or asset. Defined benefit pension scheme assets are measured at fair value using bid price for assets with quoted prices. The discount rate used is based on the Group’s cost of capital For scheme assets with no quoted price, the fair value is adjusted for the risk profiles of individual businesses. derived by using quotations from independent third parties Goodwill is tested for impairment annually. Impairment reviews or by using applicable valuation techniques at the end of each are also carried out if there is an indication that an impairment reporting period. Defined benefit pension scheme liabilities are may have occurred, or, where otherwise required, to ensure measured at the balance sheet date by an independent actuary that non-current assets are not carried above their estimated using the projected unit method and discounted at the current recoverable amounts. rate of return on high quality corporate bonds of equivalent term and currency to the liability. Impairments are recognised in the income statement. Service cost, representing the cost of employee service in m) Parent company investments the year, is included in operating costs. Net finance cost is The parent company recognises investments in subsidiary calculated by applying the discount rate used for the scheme undertakings at historical cost. liabilities to the net obligation. n) Inventory Changes in the retirement benefit obligation that arise from: Inventory is stated at the lower of cost and net realisable value. • differences between the return on scheme assets and For properties held for resale, the cost includes the cost of interest income included in the income statement; acquiring and developing the sites. • actuarial gains and losses from experience adjustments; and Net realisable value is the estimated selling price less all estimated costs of completion and costs to be incurred in • changes in demographic or financial assumptions, selling and distribution. are classified as remeasurements, charged or credited to other comprehensive income and recorded in the statement of comprehensive income in the period in which they arise.

Severn Trent Plc Annual Report and Accounts 2019 143 Group financial statements

Notes to Group financial statements continued For the year ended 31 March 2019

2. Accounting policies continued u) Derivative financial instruments Derivative financial instruments are stated at fair value, q) Retirement benefits continued including accrued interest. Fair value is determined using the There is no contractual agreement, or stated policy, for methodology described in note 34 a). The accounting policy charging the net defined benefit cost to participating Group for changes in fair value depends on whether the derivative is companies. Therefore, the parent recognises a charge in the designated as a hedging instrument. The various accounting income statement which is equal to the contributions payable policies are described below. in the year. The net defined benefit cost for these schemes is Interest receivable or payable in respect of derivative financial recognised by the sponsoring employers, Severn Trent Water instruments is included in finance income or costs. Limited and Hafren Dyfrdwy Cyfyngedig. (i) Derivatives not designated as hedging instruments (ii) Defined contribution schemes Gains or losses arising on remeasurement of derivative Contributions to defined contribution pension schemes are financial instruments that are not designated as hedging charged to the income statement in the period in which they instruments are recognised in gains/losses on financial fall due. instruments in the income statement. r) Provisions (ii) Derivatives designated as hedging instruments Provisions are recognised where: The Group uses derivative financial instruments such as cross • there is a present obligation as a result of a past event; currency swaps, forward currency contracts and interest rate swaps to hedge its risks associated with foreign currency and • it is probable that there will be an outflow of economic interest rate fluctuations. benefits to settle this obligation; and At the inception of each hedge relationship, the • a reliable estimate of this amount can be made. Group documents: Insurance provisions are recognised for claims notified and for • the relationship between the hedging instrument and the claims incurred but which have not yet been notified, based on hedged item; advice from the Group’s independent insurance advisers. • its risk management objectives and strategy for undertaking Provisions are discounted to present value using a pre-tax the hedge transaction; and discount rate that reflects the risks specific to the liability where the effect is material. • the results of tests to determine whether the hedging instrument is expected to be highly effective in offsetting s) Purchase of own shares changes in fair values or cash flows (as appropriate) of the Where market purchases of Severn Trent ordinary shares are hedged item. made through an obligating contract, a liability for the present The Group continues to test and document the effectiveness of value of the redemption amount is recognised and charged to the hedge on an ongoing basis. retained earnings. Payments for the purchase of shares are charged to the liability when made. Hedge accounting is discontinued when the hedging instrument expires, is sold, terminated or exercised, or no longer qualifies Shares held by the Severn Trent Employee Share Ownership for hedge accounting. Trust that have not vested unconditionally by the balance sheet date are deducted from shareholders’ funds until such time as (iii) Fair value hedges they vest. Where a loan or borrowing is in a fair value hedging relationship it is remeasured for changes in fair value of the t) Borrowings hedged risk at the balance sheet date, with gains or losses The accounting policy for borrowings that are the hedged item being recognised in gains/losses on financial instruments in in a fair value hedge is set out in note 2 u). the income statement. The gain or loss on the corresponding All other borrowings are initially recognised at fair value hedging instrument is also taken to gains/losses on financial less issue costs. After initial recognition, borrowings are instruments in the income statement so that the effective subsequently measured at amortised cost using the effective portion of the hedge will offset the gain or loss on the interest rate method whereby interest and issue costs are hedged item. charged to the income statement and added to the carrying If hedge accounting is discontinued, the fair value adjustment value of borrowings at a constant rate in proportion to the arising from the hedged risk on the hedged item is amortised capital amount outstanding. to the income statement over the anticipated remaining life of Index-linked debt is adjusted for changes in the relevant the hedged item. inflation index and changes in value are charged to finance costs. Borrowings denominated in foreign currency are translated to sterling at the spot rate on the balance sheet date. Exchange gains or losses resulting from this are credited or charged to gains/losses on financial instruments.

144 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance > Group financial statements Company financial statements Other information

2. Accounting policies continued w) Cash flow statement For the purpose of the cash flow statement, cash and cash u) Derivative financial instruments continued equivalents include highly liquid investments that are readily convertible to known amounts of cash and which are subject (iv) Cash flow hedges to an insignificant risk of change in value. Such investments The portion of the gain or loss on the hedging instrument are normally those with less than three months maturity from that is determined to be an effective hedge is recognised in the date of acquisition and include cash and bank balances and equity and the ineffective portion is charged to gains/losses on investments in liquid funds. financial instruments in the income statement. When the gain or loss from the hedged underlying transaction is recognised Net cash and cash equivalents include overdrafts repayable in the income statement, the gains or losses on the hedging on demand and amounts drawn under the Group’s revolving instrument that have previously been recognised in equity are credit facility. recycled through gains/losses on financial instruments in the Interest paid in the cash flow statement includes amounts income statement. charged to the income statement and amounts included in the If hedge accounting is discontinued, any cumulative gain cost of property, plant and equipment. or loss on the hedging instrument previously recognised in equity is held in equity until the forecast transaction occurs, x) Net debt or transferred to gains/losses on financial instruments in Net debt comprises borrowings including remeasurements the income statement if the forecast transaction is no longer for changes in fair value of amounts in fair value hedging expected to occur. From this point the derivative is accounted relationships, cross currency swaps that are used to fix the for in the same way as derivatives not designated as hedging sterling liability of foreign currency borrowings (whether hedge instruments. If the hedging instrument is terminated, the gains accounted or not), net cash and cash equivalents, and loans to and losses previously recognised in equity are held in equity joint ventures. until either the forecast transaction occurs or the forecast transaction is no longer expected to occur. y) Discontinued operations and assets held for sale Where an asset or group of assets (a disposal group) is (v) Embedded derivatives available for immediate sale and the sale is highly probable Where a contract includes terms that cause some of its and expected to occur within one year, then the disposal group cash flows to vary in a similar way to a derivative financial is classified as held for sale. The disposal group is measured instrument, that part of the contract is considered to be an at the lower of the carrying amount and fair value less costs to embedded derivative. sell. Depreciation is not charged on such assets. Embedded derivatives are separated from the contract and Where a group of assets, which comprises operations that measured at fair value with gains and losses taken to the can be clearly distinguished operationally and for financial income statement if: reporting purposes from the rest of the Group (a component), has been disposed of or classified as held for sale, and it: • the risks and characteristics of the embedded derivative are not closely related to those of the contract; and • represents a separate major line of business or geographical area of operations; or • the contract is not carried at fair value with gains and losses reported in the income statement. • is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or In all other cases embedded derivatives are accounted for in line with the accounting policy for the contract as a whole. • is a subsidiary acquired exclusively with a view to resale; then the component is classified as a discontinued operation. v) Share based payment The Group operates a number of equity-settled share based z) Business combinations compensation plans for employees. The fair value of the Acquisitions of subsidiaries and businesses are accounted for employee services received in exchange for the grant is using the acquisition method. The consideration transferred recognised as an expense over the vesting period of the grant. in a business combination is measured at fair value. The The fair value of employee services is determined by reference identifiable assets acquired and the liabilities assumed are to the fair value of the awards granted, calculated using recognised at their fair value at the acquisition date except that: an appropriate pricing model, excluding the impact of any • deferred tax assets or liabilities and retirement benefit non-market vesting conditions. The number of awards that assets or obligations are recognised and measured in are expected to vest takes into account non-market vesting accordance with the policies set out under notes 2 e) and 2 q) conditions including, where appropriate, continuing employment above; and by the Group. The charge is adjusted to reflect shares that do not vest as a result of failing to meet a non-market condition. • assets or disposal groups that are classified as held for sale are measured in accordance with the policy set out under Share based compensation plans are satisfied in shares of note 2 y) above. the parent company. Where the fair value of the awards is not recharged to participating Group companies, the parent company records the fair value of the awards as an increase in its investment in the subsidiary. The investment is adjusted to reflect shares that do not vest as a result of failing to meet a non-market based condition.

Severn Trent Plc Annual Report and Accounts 2019 145 Group financial statements

Notes to Group financial statements continued For the year ended 31 March 2019

2. Accounting policies continued b) Impact on lessee accounting (i) Operating leases z) Business combinations continued IFRS 16 will change how the Group accounts for leases Where the initial accounting for a business combination is previously classified as operating leases under IAS 17 which incomplete at the end of the reporting period, the Group were off balance sheet. reports provisional amounts and finalises these within one year of the acquisition date (the ‘measurement period’). On initial application of IFRS 16, for all leases (except as noted below) the Group will: Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling • recognise right-of-use assets and lease liabilities in the interest in the acquiree and the fair value of any interest in consolidated balance sheet, initially measured at the the acquiree previously held by the Group over the net of the present value of the future lease payments; amounts of the assets and liabilities acquired. If the amount of • recognise depreciation of right-of-use assets and interest on the assets and liabilities acquired exceeds the amount of the lease liabilities in the consolidated income statement; and consideration, this is immediately recognised in the income statement as a bargain purchase gain. • separate the total amount of cash paid into a principal portion and an interest portion in the consolidated cash Contingent consideration is measured at fair value at the flow statement. acquisition date. Lease incentives will be recognised as part of the During the measurement period, changes in provisional fair measurement of the right-of-use assets and lease liabilities values of assets and liabilities acquired, or of contingent whereas under IAS 17 they were recognised as a lease liability consideration, are recognised as adjustments to goodwill incentive, amortised as a reduction of rental expenses on a or bargain purchase gain. Outside the measurement period, straight-line basis. changes in fair value of contingent consideration that is not classified as equity are recognised in profit or loss. Under IFRS 16, right-of-use assets will be tested for impairment in accordance with IAS 36 Impairment of Assets. 3. New accounting policies and future requirements This will replace the previous requirement to recognise a At the balance sheet date, the following Standards and provision for onerous lease contracts. Interpretations were in issue but not yet effective: For short-term leases (lease term of 12 months or less) and leases of low-value assets, the Group will opt to recognise a IFRS 16 Leases lease expense on a straight-line basis as permitted by IFRS 16. IFRS 16 provides a comprehensive model for the identification of lease arrangements and their treatment in the financial As at 31 March 2019, the Group has non-cancellable operating statements for both lessors and lessees. IFRS 16 will supersede lease commitments of £16.9 million. the current lease guidance including IAS 17 Leases and the A preliminary assessment indicates that £16.7 million of related interpretations when it becomes effective for accounting these arrangements relate to leases other than short-term periods beginning on or after 1 January 2019. The date of initial leases and leases of low-value assets, and hence the Group application of IFRS 16 for the Group is 1 April 2019. will recognise a right-of-use asset of £23.4 million and a In contrast to lessee accounting, IFRS 16 substantially carries corresponding lease liability of £23.4 million in respect of forward the lessor accounting requirements. all these leases. The impact on profit or loss is to decrease operating costs by £2.9 million, to increase depreciation by a) Impact of the new definition of a lease £2.7 million and to increase interest expense by £0.7 million. The Group will make use of the practical expedient available There are no lease liability incentives or provision for onerous on transition to IFRS 16 not to reassess whether a contract lease contracts recognised under IAS 17 to be derecognised. is or contains a lease. Accordingly, the definition of a lease in The preliminary assessment indicates that £0.2 million of these accordance with IAS 17 and IFRIC 4 will continue to apply to arrangements relate to short-term leases and leases of low- those leases entered into or modified before 1 April 2019. value assets. The change in definition of a lease mainly relates to the concept Under IAS 17, all lease payments on operating leases are of control. IFRS 16 distinguishes between leases and service presented as part of cash flows from operating activities. contracts on the basis of whether the use of an identified asset The impact of the changes under IFRS 16 would be to increase is controlled by the customer. Control is considered to exist if the cash generated by operating activities by £2.9 million the customer has: and to decrease net cash used in financing activities by the • the right to obtain substantially all of the economic benefits same amount. from the use of an identified asset; and (ii) Finance leases • the right to direct the use of that asset. The main differences between IFRS 16 and IAS 17 with The Group will apply the definition of a lease and guidance set respect to assets formerly held under a finance lease is the out in IFRS 16 to all lease contracts entered into or modified on measurement of the residual value guarantees provided or after 1 April 2019. In preparation for the first-time application by the lessee to the lessor. IFRS 16 requires that the Group of IFRS 16, the Group has carried out an implementation recognises as part of its lease liabilities only the amount project. The project has shown that the new definition in expected to be payable under the residual value guarantee, IFRS 16 will not change significantly the scope of contracts rather than the maximum amount guaranteed as required that meet the definition of a lease for the Group. by IAS 17.

146 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance > Group financial statements Company financial statements Other information

3. New accounting policies and future requirements (ii) Retirement benefit obligations continued Determining the amount of the Group’s retirement benefit obligations and the net costs of providing such benefits b) Impact on lessee accounting continued requires assumptions to be made concerning long-term (ii) Finance leases continued interest rates, inflation and longevity of current and future pensioners. Changes in these assumptions could significantly Based on an analysis of the Group’s finance leases as at impact the amount of the obligations or the cost of providing 31 March 2019 on the basis of the facts and circumstances that such benefits. The Group makes assumptions concerning exist at that date, the Group has assessed that this change will these matters with the assistance of advice from independent not have a material impact on the amounts recognised in the qualified actuaries. Details of the assumptions made and Group’s consolidated financial statements. associated sensitivities are set out in note 28. c) Impact on lessor accounting Under IFRS 16, a lessor continues to classify leases as either 5. Segmental analysis finance leases or operating leases and account for those two The Group is organised into two main business segments: types of leases differently. However, IFRS 16 has increased Regulated Water and Waste Water includes the wholesale the disclosures required, in particular regarding how a water and waste water activities of Severn Trent Water lessor manages the risks arising from its residual interest in Limited, its retail services to domestic customers, and Hafren leased assets. Dyfrdwy Cyfyngedig. The Group does not believe there to be any impact with regards Business Services includes the Group’s Operating Services to the above. businesses in the UK & Ireland, the Green Power business, the There are no other standards and interpretations in issue Bioresources business, the Property Development business but not yet adopted that the Directors anticipate will have and our other businesses including affinity and searches. a material effect on the reported income or net assets of In 2017/18 and prior years, the sludge treatment activities of the Group. the Bioresources business were managed by, and included 4. Critical accounting judgments and key sources in, Regulated Water and Waste Water. The renewable of estimation uncertainty energy generating activities of the Bioresources business were managed by, and included in, Business Services. In the process of applying the Group’s accounting policies, These activities are now managed as a single Bioresources the Group is required to make certain judgments, estimates business within Business Services. and assumptions that it believes are reasonable based on the On 30 November 2018 the Group completed the acquisition of information available. Although these estimates are based on Agrivert Holdings Limited. This business has been included management’s best knowledge of the amount, event or actions, in the Business Services segment with effect from that date. actual results may ultimately differ from those estimates. Further details of the acquisition are set out in note 38. a) Critical accounting judgments Surplus land in the regulated business is, in certain cases, sold (i) Classification of costs between operating expenditure to group companies outside the regulatory ring-fence where its and capital expenditure full development potential can be realised. The profits of this Severn Trent Water’s business involves significant construction activity are shared between the regulated and non-regulated and engineering projects. Assessing the classification of businesses through the initial transfer price and overage costs incurred on such projects between capital expenditure agreements relating to the development potential. In 2017/18 and operating expenditure requires judgments to be made. and prior years, the gains from the property development The judgments are made based on objective criteria that the activity attributable to the regulated business were reported Group has developed to facilitate the consistent application in Regulated Water and Waste Water and those relating to the of its accounting policies. non-regulated business were reported in Corporate and other. All of these activities are now managed and reported as a b) Sources of estimation uncertainty single business within Business Services. (i) Depreciation and carrying amounts of property, plant Comparative information for the new segmentation is not and equipment available and the cost to develop it would be excessive. Therefore, Calculating the depreciation charge and hence the carrying the current period results have been presented on both the old value for property, plant and equipment requires estimates and new basis of segmentation, in accordance with IFRS 8. to be made of the useful lives of the assets. The estimates The disposal of the Group’s Operating Services businesses in are based on engineering data and the Group’s experience Italy and the USA were classified as discontinued operations of similar assets. Details are set out in note 2 i). The average in the prior year. These transactions were completed on useful life of property, plant and equipment is around 46 years. 23 February and 30 June 2017 respectively. A five year change in the average useful lives would result in a £38 million change in the depreciation charge.

Severn Trent Plc Annual Report and Accounts 2019 147 Group financial statements

Notes to Group financial statements continued For the year ended 31 March 2019

5. Segmental analysis continued The Severn Trent Executive Committee (‘STEC’) is considered to be the Group’s chief operating decision maker. The reports provided to STEC include segmental information prepared on the basis described above. Details of Regulated Water and Waste Water’s operations are described on pages 34 to 45 of the Strategic Review and those of Business Services on pages 46 to 47. Results from interests in joint ventures and associates are not included in the segmental reports reviewed by STEC. The measure of profit or loss that is reported to STEC for the segments is underlying PBIT (see note 45). A segmental analysis of turnover and underlying PBIT is presented below. Transactions between reportable segments are included within segmental results, assets and liabilities in accordance with Group accounting policies. These are eliminated on consolidation. a) Segmental results The tables below show the changes from the old to the new segmentation for turnover and underlying PBIT for the year ended 31 March 2019: Regulated Regulated Water and Water and Waste Water Property Waste Water (old basis) Bioresources1 Development2 (new basis) Regulated Water and Waste Water £m £m £m £m External turnover 1,637.6 (54.5) – 1,583.1 Inter-segment turnover – – – – Total turnover 1,637.6 (54.5) – 1,583.1 Profit before interest, tax and exceptional items 544.3 (8.7) (8.6) 527.0 Exceptional items (8.9) – – (8.9) Profit before interest and tax 535.4 (8.7) (8.6) 518.1

Business Business Services Property Services (old basis) Bioresources1 Development2 (new basis) Business Services £m £m £m £m External turnover 128.9 54.5 – 183.4 Inter-segment turnover 17.5 – – 17.5 Total turnover 146.4 54.5 – 200.9 Profit before interest, tax, amortisation of acquired intangible assets and exceptional items 35.5 8.7 19.9 64.1 Exceptional items and amortisation of acquired intangible assets (1.0) – – (1.0) Profit before interest and tax 34.5 8.7 19.9 63.1

Corporate and Corporate and other Property other (old basis) Development2 (new basis) Corporate and other £m £m £m External turnover – – – Inter-segment turnover 0.4 – 0.4 Total turnover 0.4 – 0.4 Profit before interest, tax and exceptional items 3.1 (11.3) (8.2) Exceptional items (0.4) – (0.4) Profit before interest and tax 2.7 (11.3) (8.6)

1 In 2017/18 and prior years, the sludge treatment activities of the Bioresources business were managed by, and included in, Regulated Water and Waste Water. The renewable energy generating activities of the Bioresources business were managed by, and included in, Business Services. These combined activities are now managed as a single Bioresources business within Business Services. 2 In 2017/18 and prior years, the gains from the property development activity attributable to the regulated business were reported in Regulated Water and Waste Water and those relating to the non-regulated business were reported in Corporate and other. All of these activities are now managed and reported as a single business within Business Services.

148 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance > Group financial statements Company financial statements Other information

5. Segmental analysis continued a) Segmental results continued The following table shows the segmental turnover and PBIT on the old segmentation: 2018 2019 (restated) Regulated Water and Business Regulated Water Business Waste Water Services and Waste Water Services Year ended 31 March £m £m £m £m External turnover 1,637.6 128.9 1,574.1 122.2 Inter-segment turnover – 17.5 0.5 18.8 Total turnover 1,637.6 146.4 1,574.6 141.0 Profit before interest, tax, amortisation of acquired intangible assets and exceptional items 544.3 35.5 514.9 34.8 Exceptional items (see note 8) and amortisation of acquired intangible assets (8.9) (1.0) (11.1) (1.8) Profit before interest and tax 535.4 34.5 503.8 33.0

The reportable segments’ turnover is reconciled to Group turnover as follows: 2019 2019 2018 (new basis) (old basis) (restated) Year ended 31 March £m £m £m Regulated Water and Waste Water 1,583.1 1,637.6 1,574.6 Business Services 200.9 146.4 141.0 Corporate and other 0.4 0.4 9.0 Consolidation adjustments (17.0) (17.0) (28.2) 1,767.4 1,767.4 1,696.4

Included in revenues of Regulated Water and Waste Water of £1,637.6 million (2018: £1,574.6 million) is £335.0 million (2018: £354.9 million) which arose from sales to Water Plus Select Limited. No other single customer contributed 10% or more to the Group’s revenue for either 2019 or 2018. Segmental underlying PBIT is reconciled to the Group’s profit before tax as follows: 2019 2019 2018 (new basis) (old basis) (restated) Year ended 31 March £m £m £m Regulated Water and Waste Water 527.0 544.3 514.9 Business Services 64.1 35.5 34.8 Corporate and other (8.2) 3.1 (9.7) Consolidation adjustments (9.3) (9.3) (0.2) Profit before interest, tax, amortisation of acquired intangible assets and exceptional items 573.6 573.6 539.8 Exceptional items and amortisation of acquired intangible assets: Regulated Water and Waste Water (8.9) (8.9) (11.1) Business Services (1.0) (1.0) (1.8) Corporate and other (0.4) (0.4) 0.3 Net finance costs (194.2) (194.2) (219.5) Net gains/(losses) on financial instruments 16.0 16.0 (6.7) Share of (loss)/profit of joint ventures (0.4) (0.4) 0.2 Profit before tax 384.7 384.7 301.2

The Group’s treasury and tax affairs are managed centrally by the Group Treasury and Tax departments. Finance costs are managed on a Group basis and hence interest income and costs are not reported at the segmental level. Tax is not reported to STEC on a segmental basis.

Severn Trent Plc Annual Report and Accounts 2019 149 Group financial statements

Notes to Group financial statements continued For the year ended 31 March 2019

5. Segmental analysis continued b) Segmental capital employed Separate segmental analyses of assets and liabilities are not reviewed by STEC. The balance sheet measure reviewed by STEC on a segmental basis is capital employed. The tables below show the changes from the old to the new segmentation for capital employed as at 31 March 2019: Regulated Regulated Water and Water and Waste Water Property Waste Water (old basis) Bioresources Development (new basis) Regulated Water and Waste Water £m £m £m £m Operating assets 9,501.9 (287.5) – 9,214.4 Goodwill 63.5 – – 63.5 Segment assets 9,565.4 (287.5) – 9,277.9 Segment operating liabilities (1,993.4) 7.1 – (1,986.3) Capital employed 7,572.0 (280.4) – 7,291.6

Business Business Services Property Services (old basis) Bioresources Development (new basis) Business Services £m £m £m £m Operating assets 314.7 287.5 20.1 622.3 Goodwill 28.7 – – 28.7 Interests in joint ventures and associates 37.0 – – 37.0 Segment assets 380.4 287.5 20.1 688.0 Segment operating liabilities (55.2) (7.1) (6.4) (68.7) Capital employed 325.2 280.4 13.7 619.3

Corporate and Corporate and other Property other (old basis) Development (new basis) Corporate and other £m £m £m Segment operating assets 24.1 (20.1) 4.0 Segment operating liabilities (68.7) 6.4 (62.3) Capital employed (44.6) (13.7) (58.3)

The following table shows segmental capital employed on the old basis: 2019 2018 (restated) Regulated Regulated Water and Business Water and Business Waste Water Services Waste Water Services £m £m £m £m Operating assets 9,501.9 314.7 8,900.8 200.6 Goodwill 63.5 28.7 63.5 – Interests in joint ventures and associates – 37.0 – 37.6 Segment assets 9,565.4 380.4 8,964.3 238.2 Segment operating liabilities (1,993.4) (55.2) (1,957.6) (42.7) Capital employed 7,572.0 325.2 7,006.7 195.5

Operating assets comprise other intangible assets, property, plant and equipment, retirement benefit surpluses, inventory and trade and other receivables. Operating liabilities comprise trade and other payables, retirement benefit obligations and provisions.

150 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance > Group financial statements Company financial statements Other information

5. Segmental analysis continued b) Segmental capital employed continued The reportable segments’ assets are reconciled to the Group’s total assets as follows: 2019 2019 2018 (new basis) (old basis) (restated) £m £m £m Segment assets Regulated Water and Waste Water 9,277.9 9,565.4 8,964.3 Business Services 688.0 380.4 238.2 Corporate and other 4.0 24.1 60.5 Other financial assets 109.5 109.5 87.3 Loan receivable from joint venture 142.0 142.0 135.6 Consolidation adjustments (17.3) (17.3) (60.1) Total assets 10,204.1 10,204.1 9,425.8

The consolidation adjustments comprise elimination of intra-group debtors and unrealised profits on fixed assets. The reportable segments’ liabilities are reconciled to the Group’s total liabilities as follows: 2019 2019 2018 (new basis) (old basis) (restated) £m £m £m Segment liabilities Regulated Water and Waste Water (1,986.3) (1,993.4) (1,957.6) Business Services (68.7) (55.2) (42.7) Corporate and other (62.3) (68.7) (74.6) Other financial liabilities (6,180.7) (6,180.7) (5,683.4) Current tax (9.3) (9.3) (8.6) Deferred tax (747.3) (747.3) (674.3) Consolidation adjustments 14.6 14.6 12.3 Total liabilities (9,040.0) (9,040.0) (8,428.9)

The consolidation adjustments comprise elimination of intra-group creditors. The following table shows the additions to other intangible assets and property, plant and equipment: 2019 2018 Regulated Regulated Water and Business Water and Business Waste Water Services Waste Water Services £m £m £m £m Other intangible assets 36.1 2.3 25.6 2.8 Property, plant and equipment 851.1 10.3 680.4 10.1 c) Geographical areas The Group’s sales from continuing operations were derived from the following countries: 2019 2018 (restated) £m £m UK 1,762.8 1,692.1 Other 4.6 4.3 1,767.4 1,696.4

The Group’s non-current assets (excluding financial instruments, deferred tax assets and post-employment benefit assets) were located in the UK in 2019 and 2018.

Severn Trent Plc Annual Report and Accounts 2019 151 Group financial statements

Notes to Group financial statements continued For the year ended 31 March 2019

6. Revenue Revenue recognised from contracts with customers is analysed by type of revenue and by business below: Year ended 31 March 2019 Regulated Water and Operating Waste Water Services Green Power Bioresources Other Group New basis £m £m £m £m £m £m Water and waste water services 1,581.7 – – 54.5 – 1,636.2 Operating services – 57.1 – – – 57.1 Renewable energy – – 26.4 29.0 – 55.4 Other sales 1.4 – – – 17.3 18.7 1,583.1 57.1 26.4 83.5 17.3 1,767.4

Regulated Water and Business Waste Water Services Group Old basis £m £m £m Water and waste water services 1,636.2 – 1,636.2 Operating services – 57.1 57.1 Renewable energy – 55.4 55.4 Other sales 1.4 17.3 18.7 1,637.6 129.8 1,767.4

Year ended 31 March 2018 (restated) Regulated Water and Business Waste Water Services Group £m £m £m Water and waste water services 1,568.9 – 1,568.9 Operating services – 63.0 63.0 Renewable energy – 41.6 41.6 Other sales 5.2 17.7 22.9 1,574.1 122.3 1,696.4

Income from diversions of £8.4 million (2017/18: £9.5 million), which is reimbursement of costs for diversions, is included within infrastructure maintenance expenditure within operating costs.

152 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance > Group financial statements Company financial statements Other information

7. Net operating costs

2019 2018 (restated) Before Before amortisation Amortisation amortisation Amortisation of acquired of acquired of acquired of acquired intangible intangible intangible intangible assets and assets and assets and assets and exceptional exceptional exceptional exceptional costs costs Total costs costs Total £m £m £m £m £m £m Wages and salaries 252.2 – 252.2 237.2 0.6 237.8 Social security costs 25.5 – 25.5 23.2 – 23.2 Pension costs 23.6 9.6 33.2 20.8 (8.3) 12.5 Share based payments 8.1 – 8.1 6.9 – 6.9 Total employee costs 309.4 9.6 319.0 288.1 (7.7) 280.4 Power 90.3 – 90.3 79.2 – 79.2 Carbon Reduction Commitment 5.2 – 5.2 5.9 – 5.9 Raw materials and consumables 60.6 – 60.6 55.1 – 55.1 Rates 80.8 – 80.8 82.4 – 82.4 Charge for bad and doubtful debts 25.6 – 25.6 25.8 – 25.8 Services charges 35.2 – 35.2 34.3 – 34.3 Depreciation of tangible fixed assets 315.4 – 315.4 308.2 16.8 325.0 Amortisation of intangible fixed assets 29.8 0.7 30.5 20.5 – 20.5 Hired and contracted services 242.1 – 242.1 227.7 3.5 231.2 Operating lease rentals – land and buildings 2.3 – 2.3 0.6 – 0.6 – other 1.6 – 1.6 1.1 – 1.1 Hire of plant and machinery 6.8 – 6.8 5.5 – 5.5 Research and development expenditure – – – 2.1 – 2.1 Loss/(profit) on disposal of tangible fixed assets 0.6 – 0.6 (3.4) – (3.4) Exchange losses 0.1 – 0.1 1.1 – 1.1 Infrastructure maintenance expenditure 141.6 – 141.6 135.2 – 135.2 Ofwat licence fees 5.1 – 5.1 3.6 – 3.6 Other operating costs 43.2 – 43.2 48.0 – 48.0 Other operating income (3.3) – (3.3) (3.0) – (3.0) 1,392.4 10.3 1,402.7 1,318.0 12.6 1,330.6 Release from deferred credits (14.7) – (14.7) (14.3) – (14.3) Own work capitalised (164.0) – (164.0) (143.2) – (143.2) 1,213.7 10.3 1,224.0 1,160.5 12.6 1,173.1

Further details of exceptional costs are given in note 8. Adjusting costs are amortisation of acquired intangible assets. During the year the following fees were charged by the auditor: 2019 2018 £m £m Fees payable to the Company’s auditor for: – the audit of the Company’s annual accounts 0.2 0.2 – the audit of the Company’s subsidiary accounts 0.4 0.4 Total audit fees 0.6 0.6 Fees payable to the Company’s auditor and its associates for other services to the Group: – audit related assurance services 0.1 0.1 – other assurance services 0.1 0.1 Total non-audit fees 0.2 0.2

Details of Directors’ remuneration are set out in the Directors’ remuneration report on pages 97 to 122. Other assurance services also include certain agreed upon procedures performed by Deloitte in connection with Severn Trent Water’s regulatory reporting requirements to Ofwat.

Severn Trent Plc Annual Report and Accounts 2019 153 Group financial statements

Notes to Group financial statements continued For the year ended 31 March 2019

7. Net operating costs continued Details of the Group policy on the use of the auditor for non-audit services and how auditor independence and objectivity are safeguarded are set out in the Audit Committee report on pages 85 to 92. No services were provided pursuant to contingent fee arrangements. 8. Exceptional items before tax 2019 2018 (restated) £m £m Regulated Water and Waste Water Restructuring costs – (18.8) Gain arising on pension exchange arrangement – 7.7 GMP equalisation costs (8.9) – (8.9) (11.1) Business Services Restructuring costs – (2.1) Gain arising on pension exchange arrangement – 0.3 GMP equalisation costs (0.3) – (0.3) (1.8) Corporate and other Gain arising on pension exchange arrangement – 0.3 GMP equalisation costs (0.4) – (0.4) 0.3 (9.6) (12.6)

9. Employee numbers Average number of employees (including Executive Directors) during the year: 2019 2018 Continuing Discontinued operations operations Total Number number number number By type of business Regulated Water and Waste Water 5,680 5,660 – 5,660 Business Services 889 596 368 964 Corporate and other 11 9 – 9 6,580 6,265 368 6,633

10. Finance income 2019 2018 £m £m Interest income earned on bank deposits 0.2 0.5 Other financial income 7.7 5.2 Total interest receivable 7.9 5.7 Interest income on defined benefit scheme assets 61.0 62.0 68.9 67.7

154 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance > Group financial statements Company financial statements Other information

11. Finance costs 2019 2018 £m £m Interest expense charged on: Bank loans and overdrafts 21.3 19.2 Other loans 153.0 183.4 Finance leases 4.4 4.4 Total borrowing costs 178.7 207.0 Other financial expenses 9.6 2.7 Interest cost on defined benefit scheme liabilities 74.8 77.5 263.1 287.2

Borrowing costs of £33.2 million (2018: £26.2 million) incurred funding eligible capital projects have been capitalised at an interest rate of 3.40% (2018: 3.89%). Tax relief of £5.5 million (2018: £5.0 million) was claimed on these costs which was credited to the income statement, offset by a related deferred tax charge of £4.9 million (2018: £4.5 million). 12. Gains/(losses) on financial instruments 2019 2018 £m £m Gain/(loss) on swaps used as hedging instruments in fair value hedges 0.3 (1.1) Gain arising on debt in fair value hedges 0.5 – Exchange (loss)/gain on other loans (8.1) 12.7 Loss on cash flow hedges transferred from equity (8.2) (8.2) Hedge ineffectiveness on cash flow hedges 1.9 1.4 Gain/(loss) arising on swaps where hedge accounting is not applied 28.5 (12.6) Amortisation of fair value adjustment on debt 1.1 1.1 16.0 (6.7)

The net gain/(loss) on financial assets and liabilities mandatorily measured at fair value through profit or loss was £28.8 million (2018: loss of £13.7 million). There were no financial assets or liabilities designated as at fair value through the profit or loss (2018: nil). The Group’s hedge accounting arrangements are described in note 36. 13. Taxation a) Analysis of tax charge/(credit) in the year

2019 2018 (restated) £m £m Current tax at 19% (2018: 19%) Current year 41.2 36.8 Prior years (9.4) (3.9) Total current tax 31.8 32.9 Deferred tax Origination and reversal of temporary differences: Current year 30.1 21.1 Prior years 7.5 7.6 Total deferred tax 37.6 28.7 69.4 61.6

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Notes to Group financial statements continued For the year ended 31 March 2019

13. Taxation continued b) Factors affecting the tax charge/(credit) in the year The tax expense for the year is lower (2018: higher) than the standard rate of corporation tax in the UK of 19% (2018: 19%). The differences are explained below: 2019 2018 (restated) £m £m Profit before taxation 384.7 301.2 Tax at standard rate of corporation tax in the UK 19% (2018: 19%) 73.1 57.2 Tax effect of depreciation on non-qualifying assets 1.1 1.8 Other permanent differences 0.6 1.4 Current year impact of rate change (3.5) (2.5) Adjustments in respect of prior years (1.9) 3.7 Total tax charge 69.4 61.6

2019 2018 (restated) £m £m Profit before taxation 384.7 301.2 Tax at standard rate of corporation tax in the UK 19% (2018: 19%) 73.1 57.2 Tax effect of depreciation on non-qualifying assets 1.1 1.8 Other permanent differences 0.6 1.4 Tax effect of accelerated capital allowances (29.5) (19.7) Other timing differences (4.1) (3.9) Adjustments in respect of prior years (9.4) (3.9) Total current tax charge 31.8 32.9 c) Tax charged/(credited) directly to other comprehensive income or equity In addition to the amount charged/(credited) to the income statement, the following amounts of tax have been charged/(credited) to other comprehensive income or equity: 2019 2018 £m £m Current tax Tax on share based payments (0.2) (0.8) Tax on pension contributions in excess of income statement charge (9.5) (9.3) Total current tax credited to other comprehensive income or equity (9.7) (10.1) Deferred tax Tax on actuarial gain 21.7 16.9 Tax on cash flow hedges (1.5) 1.0 Tax on share based payments – 1.3 Tax on transfers to the income statement 1.3 1.4 Total deferred tax charged to other comprehensive income or equity 21.5 20.6

14. Dividends Amounts recognised as distributions to owners of the Company in the period: 2019 2018 Pence per share £m Pence per share £m Final dividend for the year ended 31 March 2018 (2017) 51.92 122.9 48.90 115.2 Interim dividend for the year ended 31 March 2019 (2018) 37.35 89.0 34.63 81.8 Total dividends paid 89.27 211.9 83.53 197.0

Proposed final dividend for the year ended 31 March 2019 56.02 135.0

The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements.

156 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance > Group financial statements Company financial statements Other information

15. Earnings per share a) Basic and diluted earnings per share Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year, excluding treasury shares and those held in the Severn Trent Employee Share Ownership Trust, which are treated as cancelled. For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. Basic and diluted earnings per share from continuing and discontinued operations are calculated on the basis of profit from continuing and discontinued operations attributable to the equity holders of the Company. The calculation of basic and diluted earnings per share is based on the following data:

(i) Earnings for the purpose of basic and diluted earnings per share from continuing operations

2019 2018 (restated) £m £m Profit for the year 315.3 252.8 Adjusted for profit from discontinued operations (see note 39) – (13.2) Profit for the year from continuing operations 315.3 239.6

(ii) Number of shares

2019 2018 £m £m Weighted average number of ordinary shares for the purpose of basic earnings per share 236.3 235.3 Effect of dilutive potential ordinary shares: – share options and LTIPs 0.4 0.8 Weighted average number of ordinary shares for the purpose of diluted earnings per share 236.7 236.1 b) Underlying earnings per share

2019 2018 (restated) pence pence Underlying basic earnings per share 145.8 120.5 Underlying diluted earnings per share 145.6 120.1

Underlying earnings per share figures are presented for continuing operations. These exclude the effects of exceptional items before tax, current tax related to exceptional items, amortisation of acquired intangible assets, net gains/losses on financial instruments, current tax on net gains/losses on financial instruments and deferred tax. The Directors consider that the adjusted figures provide a useful additional indicator of performance. The denominators used in the calculations of adjusted basic and diluted earnings per share are the same as those used in the unadjusted figures set out above. The adjustments to earnings that are made in calculating underlying earnings per share are as follows: 2019 2018 (restated) £m £m Earnings for the purpose of basic and diluted earnings per share from continuing operations 315.3 239.6 Adjustments for: – exceptional items before tax 9.6 12.6 – current tax related to exceptional items – (0.7) – amortisation of acquired intangible assets 0.7 – – net (gains)/losses on financial instruments (16.0) 6.7 – current tax on net gains/losses on financial instruments (2.6) (3.3) – deferred tax 37.6 28.7 Earnings for the purpose of underlying basic and diluted earnings per share 344.6 283.6

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Notes to Group financial statements continued For the year ended 31 March 2019

16. Goodwill 2019 2018 £m £m Cost At 1 April 62.2 81.0 Acquisition of subsidiary (note 38) 28.7 – Disposal of subsidiaries – (14.4) Exchange adjustments – (0.6) Additional consideration in respect of acquisition – 0.2 Adjustment to provisional fair values on acquisition – (4.0) At 31 March 90.9 62.2

Goodwill is allocated to the Group’s cash-generating units (CGUs) identified according to operating segment. A summary of the carrying amount of goodwill by CGU is presented below. 2019 2018 £m £m Regulated Water and Waste Water 62.2 62.2 Agrivert 28.7 – 90.9 62.2

Regulated Water and Waste Water also has an intangible asset with an indefinite useful life amounting to £4.3 million (2018: £4.3 million). a) Regulated Water and Waste Water On 1 July 2018 Instruments of Appointment of Severn Trent Water Limited and Hafren Dyfrdwy Cyfyngedig (formerly Dee Valley Water Limited) were amended to align the areas for which the appointments were made with the national border of England and Wales. As a result, the business that the goodwill relates to is now partly in Severn Trent Water and partly Hafren Dyfrdwy consequently this goodwill is now allocated to the Regulated Water and Waste Water cash-generating unit. The Group has reviewed the carrying value of goodwill for impairment in accordance with the policy stated in note 2. The carrying value of the Regulated Water and Waste Water CGU was determined on the basis of fair value, through a level 3 valuation, in the current year. The assessment of the valuation technique was reassessed in the year to align the valuation to reflect the capital intensive nature of the business and in line with IAS 36 to ensure that the valuation is the higher of value in use or fair value less costs to sell. The fair value determined using a discounted cash flow calculation for the Regulated Water and Waste Water segment is based on the most recent financial projections available for the business, which cover the remainder of the current AMP period to 2020 and the following AMP period, which runs to 31 March 2025. As a regulated water company, the revenues and costs within the Regulated Water and Waste Water segment are significantly influenced by the regulatory settlement for each AMP period so management considers it appropriate for the detailed projections to be coterminous with the AMP period. The key assumptions underlying these projections are: % Discount rate 6.5 RPI inflation 3.0 CPI inflation 2.0 Growth rate in the period beyond the detailed projections 1.5

The discount rate was an estimate for the weighted average cost of capital at the year end date based on the nominal pre-tax WACC detailed in the Ofwat PR19 methodology adjusted to reflect the actual gearing of the Regulated Water and Waste Water operating segment. The rate disclosed above is the equivalent pre-tax nominal rate. Inflation has been included in the detailed projections at 3% and 2% for RPI and CPI respectively based on the Bank of England’s target rate for CPI. Cash flows beyond the end of the six-year period are extrapolated using an assumed real growth rate of 1.5% in the Group’s regulatory capital base. The fair value less costs to sell for the CGU exceeded its carrying value by £4,248 million. An increase in the discount rate to 7.6% or a reduction in the growth rate in the period beyond the detailed projections to 0.7% would reduce the recoverable amount to the carrying amount of the goodwill.

158 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance > Group financial statements Company financial statements Other information

16. Goodwill continued b) Agrivert On 30 November 2018, Agrivert Holdings and its subsidiary undertakings were acquired by Severn Trent Group resulting in provisional goodwill of £28.7 million. This goodwill has been allocated to the Agrivert Group cash-generating unit which is determined to be the lowest level of independent cash flows relating to the goodwill. Agrivert Group is included within the Green Power part of the Business Services segment. The Group has reviewed the carrying value of goodwill for impairment in accordance with the policy stated in note 2. The carrying value of the Agrivert Group CGU was determined on the basis of a value in use calculation. The fair value determined using a discounted cash flow calculation for the Agrivert Group CGU is based on the most recent financial projections available for the business to 2024. The key assumptions underlying these projections are: % Discount rate 11.3 RPI inflation 2.1 Growth rate in the period beyond the detailed projections 2.0

The discount rate was based on the post-tax internal rate of return for the acquisition and benchmarked against market data for green energy transactions in 2018. This rate was then converted to the equivalent pre-tax rate disclosed above. Cash flows beyond the end of the five year period are extrapolated using an assumed growth of 2.0% in the Agrivert’s free cash flows. The value in use for the CGU exceeded its carrying value by £15 million. An increase in the discount rate to 12.1% or reduction in the growth rate in the period beyond the detailed projections to 1.2% would reduce the recoverable amount to the carrying amount of the goodwill. 17. Other intangible assets Computer software Capitalised development Other Internally costs and intangible generated Purchased patents assets Total £m £m £m £m £m Cost At 1 April 2017 202.7 113.8 13.9 – 330.4 Additions 9.8 18.2 0.4 – 28.4 Disposals (0.7) – (1.5) – (2.2) Adjustment to provisional fair values – – – 4.3 4.3 Disposals of subsidiaries – (7.2) – – (7.2) Exchange adjustments (0.1) (0.1) – – (0.2) At 1 April 2018 211.7 124.7 12.8 4.3 353.5 Additions 23.8 11.3 – – 35.1 Disposals (0.3) (1.0) – – (1.3) Acquisition of subsidiaries (note 38) – – – 31.5 31.5 At 31 March 2019 235.2 135.0 12.8 35.8 418.8 Amortisation At 1 April 2017 (166.2) (70.6) (12.7) – (249.5) Amortisation for the year (8.0) (12.6) (0.1) – (20.7) Disposals 0.6 – – – 0.6 Disposals of subsidiaries – 4.3 – – 4.3 Exchange adjustments – 0.2 – – 0.2 At 1 April 2018 (173.6) (78.7) (12.8) – (265.1) Amortisation for the year (14.5) (15.3) – (0.7) (30.5) Disposals 0.2 0.8 – – 1.0 At 31 March 2019 (187.9) (93.2) (12.8) (0.7) (294.6) Net book value At 31 March 2019 47.3 41.8 – 35.1 124.2 At 31 March 2018 38.1 46.0 – 4.3 88.4

Other intangible assets includes the Instrument of Appointment acquired with Dee Valley Water and customer contracts and energy subsidy contracts both acquired with Agrivert.

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Notes to Group financial statements continued For the year ended 31 March 2019

18. Property, plant and equipment Land and Infrastructure Fixed plant and Assets under buildings assets equipment Moveable plant construction Total £m £m £m £m £m £m Cost At 1 April 2017 3,313.0 5,114.2 4,052.3 73.9 630.5 13,183.9 Additions 9.1 60.5 16.4 0.9 604.3 691.2 Transfers on commissioning 69.4 52.2 136.5 4.4 (262.5) – Disposals (2.0) (0.3) (12.4) (2.9) (0.8) (18.4) Adjustment to provisional fair values – 0.8 – – – 0.8 Disposal of subsidiary undertaking – – (15.2) (19.2) – (34.4) Reclassifications (3.0) 6.5 (10.7) (0.3) 7.5 – Exchange adjustments – – (0.9) (1.2) – (2.1) At 1 April 2018 3,386.5 5,233.9 4,166.0 55.6 979.0 13,821.0 Additions 77.9 146.8 110.3 11.5 514.9 861.4 Transfers on commissioning 54.4 26.5 124.9 2.8 (208.6) – Disposals (0.9) (0.1) (2.4) (4.0) (1.3) (8.7) Acquisition of subsidiary undertaking (note 38) 63.2 – 6.0 0.2 – 69.4 At 31 March 2019 3,581.1 5,407.1 4,404.8 66.1 1,284.0 14,743.1 Depreciation At 1 April 2017 (1,197.0) (1,298.9) (2,520.6) (51.0) – (5,067.5) Charge for the year (84.5) (31.5) (188.0) (4.8) – (308.8) Disposals 1.7 – 12.9 2.7 – 17.3 Disposal of subsidiary undertaking – – 10.2 14.8 – 25.0 Reclassifications 4.1 (1.5) (3.0) 0.4 – – Exceptional depreciation (10.1) – (6.7) – – (16.8) Exchange adjustments – – 0.7 1.0 – 1.7 At 1 April 2018 (1,285.8) (1,331.9) (2,694.5) (36.9) – (5,349.1) Charge for the year (85.7) (36.8) (188.4) (4.5) – (315.4) Disposals 0.7 – 2.4 3.9 – 7.0 At 31 March 2019 (1,370.8) (1,368.7) (2,880.5) (37.5) – (5,657.5) Net book value At 31 March 2019 2,210.3 4,038.4 1,524.3 28.6 1,284.0 9,085.6 At 31 March 2018 2,100.7 3,902.0 1,471.5 18.7 979.0 8,471.9

The carrying amount of property, plant and equipment includes the following amounts in respect of assets held under finance leases: Infrastructure Fixed plant and assets equipment Total £m £m £m Net book value At 31 March 2019 114.8 4.0 118.8 At 31 March 2018 115.8 6.4 122.2

The depreciation charge includes £nil (2018: £16.8 million) in respect of the write-off of redundant plant and equipment.

160 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance > Group financial statements Company financial statements Other information

19. Interests in joint ventures Particulars of the Group’s principal joint venture undertaking at 31 March 2019 were: Name Type Country of incorporation Class of share capital held Proportion of ownership interest Water Plus Limited Joint venture Great Britain Ordinary B 50%

The results and net assets of the principal joint venture are shown below: Interests in joint venture 2019 2018 £m £m Group's share of carrying value 37.0 37.6 Group's share of (loss)/profit and comprehensive (loss)/income (0.4) 0.2

All results are from continuing operations in both the current and preceding year. As at 31 March 2019 and 2018 the joint venture did not have any significant contingent liabilities to which the Group was exposed and, other than is set out below, the Group did not have any significant contingent liabilities in relation to its interests in the joint venture. The Group had no capital commitments in relation to its interests in the joint venture at 31 March 2019 or 2018. The parent company has given guarantees in favour of Water Plus Limited in respect of the joint venture’s liabilities to wholesalers in the Open Water market and its loan from Severn Trent Water Limited. The guarantee in respect of liabilities to wholesalers is capped at £58.1 million (2018: £42.5 million) and the guarantee for the Severn Trent Water loan is for the amount due. The registered office of Water Plus is Two Smithfield, Leonard Coates Way, Stoke-On-Trent, ST1 4FD. 20. Categories of financial assets 2019 2018 Note £m £m Fair value through profit and loss Cross currency swaps – not hedge accounted 18.0 5.8 Interest rate swaps – not hedge accounted 26.1 11.4 44.1 17.2 Derivatives designated as hedging instruments Cross currency swaps – fair value hedges 19.1 18.7 Energy hedges – cash flow hedges 5.3 0.3 24.4 19.0 Total derivative financial assets 68.5 36.2 Financial assets at amortised cost Net trade receivables 21 221.5 191.0 Net accrued income 21 223.3 215.2 Contract assets 21 35.1 39.1 Other amounts receivable 21 64.6 44.2 Loan receivable from joint venture 21 142.0 135.6 Short term deposits 22 – 16.4 Cash at bank and in hand 22 41.0 34.7 Total financial assets at amortised cost 727.5 676.2 Total financial assets 796.0 712.4 Disclosed in the balance sheet as: Non-current assets Derivative financial assets 68.4 36.0 Trade and other receivables 47.6 3.9 Loan receivable from joint venture 142.0 135.6 258.0 175.5 Current assets Derivative financial assets 0.1 0.2 Trade and other receivables 496.9 440.9 Cash at bank and in hand 41.0 51.1 538.0 492.2 796.0 667.7

Severn Trent Plc Annual Report and Accounts 2019 161 Group financial statements

Notes to Group financial statements continued For the year ended 31 March 2019

21. Trade and other receivables 2019 2018 £m £m Current assets Net trade receivables 221.5 191.0 Other amounts receivable 48.9 38.7 Contract assets 3.2 4.0 Prepayments 16.6 11.5 Net accrued income 223.3 211.2 513.5 456.4 Non-current assets Other amounts receivable 15.7 1.5 Prepayments 14.4 9.1 Contract assets 31.9 35.1 Loan receivable from joint venture 142.0 135.6 204.0 181.3 717.5 637.7 The carrying values of trade and other receivables are reasonable approximations of their fair values.

Contract assets Contract assets arise on the MOD contract when the value of work performed is greater than the amounts billed. Amounts billed are determined based on a volumetric tariff for water supplied. Movements on the contract assets were as follows: 2019 2018 £m £m At 1 April 39.1 36.6 Amounts billed (46.1) (44.7) Revenue recognised 42.1 47.2 At 31 March 35.1 39.1

During the year no revenue was recognised from performance obligations satisfied in previous periods. The total transaction price allocated to the remaining performance obligations represents the contracted revenue to be earned by the Group for distinct services which the Group has promised to deliver to its customer. These include promises which are partially satisfied at the period end. In deriving the transaction price, any element of variable revenue is estimated at a value that is highly probable not to reverse in the future. The total transaction price allocated to remaining performance obligation is £509.6 million, with £43.5 million receivable in 2020, £43.9 million receivable in 2021 and £422.2 million receivable in 2022 onwards.

162 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance > Group financial statements Company financial statements Other information

21. Trade and other receivables continued Bad debt provision Movements on the bad debt provision were as follows: 2019 2018 £m £m At 1 April 129.0 130.5 Charge for bad and doubtful debts (continuing and discontinued operations) 25.6 27.3 Acquisition – – Disposal of subsidiary undertaking – (1.2) Amounts written off during the year (34.4) (27.6) At 31 March 120.2 129.0

The aged analysis of receivables that are specifically provided for is as follows: 2019 2018 £m £m Trade receivables Up to 90 days – 0.5 91 – 365 days – 1.2 1 – 2 years 0.1 5.2 2 – 3 years 0.6 2.5 More than 3 years 12.3 5.6 13.0 15.0

A collective provision is recorded for expected credit losses against assets for which no specific provision has been made. This is calculated based on historical experience of bad debt write-offs. For the year ended 31 March 2018 there is no material difference between the bad debt provision under IAS 39 and the provision for the lifetime expected credit losses under IFRS 9. Debts are written off when there is no realistic expectation of further collection. The aged analysis of expected credit loss provisions for receivables past due not individually provided for is as follows: 2019 2018 £m £m Up to 90 days 58.5 43.6 91 – 365 days 88.0 80.0 1 – 2 years 60.3 57.5 2 – 3 years 38.7 40.7 More than 3 years 74.9 77.4 320.4 299.2

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Notes to Group financial statements continued For the year ended 31 March 2019

21. Trade and other receivables continued The amounts above are reconciled to gross and net debtors in the table below: 2019 2018 Gross Provision Net Gross Provision Net £m £m £m £m £m £m Accrued income – not due 225.2 (1.9) 223.3 215.2 (1.2) 214.0 Trade receivables Not due 6.4 – 6.4 5.8 – 5.8 Overdue not specifically provided 320.4 (105.3) 215.1 299.2 (112.8) 186.4 Overdue and specifically provided 13.0 (13.0) – 15.0 (15.0) – 565.0 (120.2) 444.8 535.2 (129.0) 406.2

Credit risk Trade receivables Credit control policies and procedures are determined at the individual business unit level. By far the most significant business unit of the Group is Severn Trent Water Limited, which represents 93% of Group turnover and 90% of net trade receivables. Severn Trent Water has a statutory obligation to provide water and waste water services to domestic customers within its region. Therefore there is no concentration of credit risk with respect to its trade receivables from these services and the credit quality of its customer base reflects the wealth and prosperity of all of the domestic households within its region. The expected credit loss rate is 1.9%.

Water Plus In the current and prior year, the Group’s joint venture, Water Plus, was the largest retailer for non-domestic customers in the Severn Trent region. The trade receivables and amounts shown as loans receivable from joint ventures are disclosed within note 44. 22. Cash and cash equivalents 2019 2018 £m £m Cash at bank and in hand 41.0 34.7 Short-term deposits – 16.4 41.0 51.1

Short-term bank deposits are held as security deposits for insurance obligations, which are not available for use by the Group. In addition, £14.7 million (2018: £9.8 million) of cash at bank and in hand is restricted for use on the MOD contract and is not available for use by the Group. 23. Borrowings 2019 2018 £m £m Current liabilities Bank overdraft 1.4 12.6 Bank loans 188.7 287.9 Other loans 2.8 5.3 Finance leases 4.1 2.9 197.0 308.7 Non-current liabilities Bank loans 931.4 929.5 Other loans 4,817.7 4,218.6 Finance leases 108.1 111.0 5,857.2 5,259.1 6,054.2 5,567.8

164 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance > Group financial statements Company financial statements Other information

24. Finance leases Obligations under finance leases are due as follows: 2019 2018 £m £m Within 1 year 7.3 6.5 1 – 2 years 7.8 7.0 2 – 5 years 26.3 24.3 After more than 5 years 103.7 113.1 Gross obligations under finance leases 145.1 150.9 Less future finance charges (32.9) (37.0) Present value of lease obligations 112.2 113.9

Net obligations under finance leases fall due as follows: 2019 2018 £m £m Within 1 year 4.1 2.9 1 – 2 years 4.1 3.2 2 – 5 years 16.1 13.7 After more than 5 years 87.9 94.1 Included in non-current liabilities 108.1 111.0 112.2 113.9

The remaining terms of finance leases ranged from 1 to 13 years at 31 March 2019. Interest terms are set at the inception of the leases. The leases bear fixed interest at a weighted average rate of 5.34% (2018: 5.34%). The lease obligations are secured against the related assets. There were no contingent rents, escalation clauses or material renewal or purchase options. The terms of the finance leases do not impose restriction on dividend payments, additional debt or further leasing.

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Notes to Group financial statements continued For the year ended 31 March 2019

25. Categories of financial liabilities 2019 2018 Note £m £m Fair value through profit and loss Interest rate swaps – not hedge accounted 94.1 98.8 Inflation swaps – not hedge accounted 6.2 2.8 100.3 101.6 Derivatives designated as hedging instruments Interest rate swaps – cash flow hedges 25.8 13.6 Energy hedges – cash flow hedges 0.4 0.8 26.2 14.4 Total derivative financial liabilities 126.5 116.0 Other financial liabilities Borrowings 23 6,054.2 5,567.8 Trade payables 26 32.2 18.9 Other payables 29.9 21.6 Total other financial liabilities 6,116.3 5,608.3 Total financial liabilities 6,242.8 5,724.3 Disclosed in the balance sheet as: Non-current liabilities Derivative financial liabilities 126.5 116.0 Other payables 8.4 – Borrowings 5,857.2 5,259.1 5,992.1 5,375.1 Current liabilities Borrowings 197.0 308.7 Trade payables 32.2 18.9 Other payables 21.5 21.6 250.7 349.2 6,242.8 5,724.3

26. Trade and other payables 2019 2018 £m £m Current liabilities Trade payables 32.2 18.9 Social security and other taxes 11.5 6.9 Other payables 21.5 21.6 Accruals 412.6 400.3 Deferred income 18.9 14.9 496.7 462.6 Non-current liabilities Other payables 8.4 – Accruals 0.4 0.4 Deferred income 1,074.1 1,009.0 1,082.9 1,009.4 1,579.6 1,472.0

166 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance > Group financial statements Company financial statements Other information

27. Deferred tax An analysis of the movements in the major deferred tax liabilities and assets recognised by the Group is set out below: Retirement Fair value Accelerated tax benefit of financial depreciation obligations instruments Other Total £m £m £m £m £m At 1 April 2017 758.9 (78.7) (46.1) (10.4) 623.7 Charge/(credit) to income 24.5 (0.3) 1.6 3.2 29.0 Charge for adjustments to provisional fair values 0.1 – – 1.0 1.1 Charge to equity – 16.9 2.4 1.3 20.6 At 1 April 2018 783.5 (62.1) (42.1) (4.9) 674.4 Restatement – – – 0.8 0.8 At 1 April 2018 restated 783.5 (62.1) (42.1) (4.1) 675.2 Charge/(credit) to income 36.3 (2.3) 5.2 (1.6) 37.6 Acquired on acquisition 3.8 – – 9.4 13.2 Charge/(credit) to equity arising from rate change – 21.7 (0.2) – 21.5 At 31 March 2019 823.6 (42.7) (37.1) 3.7 747.5

Deferred tax assets and liabilities have been offset. The offset amounts, which are to be recovered/settled after more than 12 months, are as follows: 2019 2018 (restated) £m £m Deferred tax asset (79.8) (108.4) Deferred tax liability 827.3 783.6 747.5 675.2

28. Retirement benefit schemes a) Defined benefit pension schemes (i) Background The Group operates a number of defined benefit pension schemes. The Severn Trent Pension Scheme and the Severn Trent Mirror Image Pension Scheme closed to future accrual on 31 March 2015, while the Dee Valley Water Limited Section of the Water Companies Pension Scheme, which is a sectionalised scheme, currently remains open to accrual. The defined benefit pension schemes cover increases in accrued benefits arising from inflation and pension increases. Their assets are held in separate funds administered by trustees. The trustees are required to act in the best interests of the schemes’ beneficiaries. A formal actuarial valuation of each scheme is carried out on behalf of the trustees at triennial intervals by an independent professionally qualified actuary. Under the defined benefit pension schemes, members are entitled to retirement benefits calculated by reference to their pensionable service and pensionable salary history, with inflationary pension increases applying in line with the scheme rules. The defined benefit pension schemes and the dates of their last completed formal actuarial valuations as at the accounting date are as follows: Date of last formal actuarial valuation Severn Trent Pension Scheme (STPS)* 31 March 2016 Severn Trent Mirror Image Pension Scheme (STMIPS) 31 March 2016 Water Companies Pension Scheme – Dee Valley Water Limited Section (DVWS) 31 March 2017

The STPS is by far the largest of the Group’s UK defined benefit schemes, comprising over 90% of the Group’s overall defined benefit obligations.

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Notes to Group financial statements continued For the year ended 31 March 2019

2019 2018 £m £m Fair value of assets 2,418.9 2,339.8 Present value of the defined benefit obligations (2,871.8) (2,859.6) (452.9) (519.8) Presented on the balance sheet as: Retirement benefit obligation – funded schemes in surplus 18.6 18.2 Retirement benefit obligation – funded schemes in deficit (462.9) (529.3) Retirement benefit obligation – unfunded schemes (8.6) (8.7) (471.5) (538.0) Net retirement benefit obligation (452.9) (519.8)

2019 2018 £m £m Fair value of scheme assets Equities 356.6 360.4 Diversified growth funds – 5.3 Corporate bonds 899.2 825.7 Liability-driven investment funds (‘LDIs’) 746.0 783.1 Property 228.2 180.7 Emerging markets multi-asset funds – 3.9 High-yield bonds 31.3 3.4 Hedge funds – 0.6 Cash 157.6 176.7 2,418.9 2,339.8

The majority of the assets have quoted prices in active markets, but there are a small proportion of the equity and LDI investments which are unquoted. Movements in the fair value of the scheme assets were as follows: 2019 2018 £m £m Fair value at 1 April 2,339.8 2,352.8 Interest income on scheme assets 61.0 62.0 Contributions from the sponsoring companies 34.9 35.2 Contributions from scheme members 0.1 0.1 Return on plan assets (excluding amounts included in finance income) 95.9 (1.3) Scheme administration costs (2.3) (1.8) Benefits paid (110.5) (107.2) Fair value at 31 March 2,418.9 2,339.8

Movements in the present value of the defined benefit obligations were as follows: 2019 2018 £m £m Present value at 1 April (2,859.6) (2,927.4) Service cost (0.2) (0.5) Exceptional past service (cost)/credit (9.6) 8.3 Interest cost (74.8) (77.5) Contributions from scheme members (0.1) (0.1) Actuarial gains arising from changes in demographic assumptions 55.7 21.6 Actuarial (losses)/gains arising from changes in financial assumptions (132.7) 6.9 Actuarial gains arising from experience adjustments 39.0 1.9 Benefits paid 110.5 107.2 Present value at 31 March (2,871.8) (2,859.6)

168 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance > Group financial statements Company financial statements Other information

28. Retirement benefit schemes continued a) Defined benefit pension schemes continued (ii) Amount included in the balance sheet arising from the Group’s obligations under the defined benefit pension schemes continued The Group has an obligation to pay pensions to a number of former employees, whose benefits would otherwise have been restricted by the Finance Act 1989 earnings cap. Provision for such benefits amounting to £8.6 million (2018: £8.7 million) is included as an unfunded scheme within the retirement benefit obligation. The Group has assessed that is has an unconditional right to a refund of any surplus assets in each of the schemes following settlement of all obligations to scheme members and therefore the surplus in DVWS has been recognised in full.

(iii) Amounts recognised in the income statement in respect of these defined benefit pension schemes

2019 2018 £m £m Amounts (charged)/credited to operating costs: Current service cost (0.2) (0.5) Exceptional past service (cost)/credit (9.6) 8.3 Scheme administration costs (2.3) (1.8) (12.1) 6.0 Amounts charged to finance costs: Interest cost (74.8) (77.5) Amounts credited to finance income: Interest income on scheme assets 61.0 62.0 Total amount credited to the income statement (25.9) (9.5)

The actual return on scheme assets was a gain of £156.9 million (2018: £60.7 million). Actuarial gains and losses have been reported in the statement of comprehensive income. On 26 October 2018, the High Court issued a judgment in a claim involving Lloyds Banking Group’s defined benefit pension schemes. This judgment concluded the schemes should be amended to equalise pension benefits for men and women in relation to guaranteed minimum pension benefits. The issues determined by the judgment have a potential consequence for the schemes. The Group has estimated the cost of equalising benefits, and has allowed for this cost within the exceptional past service cost item in 2018/19. Any subsequent changes to this amount in future periods will be treated as a change in actuarial assumption, and as such will be recognised in other comprehensive income.

(iv) Actuarial risk factors The schemes typically expose the Group to actuarial risks such as investment risk, inflation risk and longevity risk.

Investment risk The Group’s contributions to the schemes are based on actuarial calculations which make assumptions about the returns expected from the schemes’ investments. If the investments underperform these assumptions in the long-term then the Group may need to make additional contributions to the schemes in order to fund the payment of accrued benefits. Each plan’s investment strategy seeks to balance the level of investment return sought with the aim of reducing volatility and risk. In undertaking this approach reference is made to both the maturity of liabilities and the funding level of that plan. A number of further strategies are employed to manage underlying risks, including liability-matching asset strategies, diversification of asset portfolios and interest rate hedging. Currently the plan has a balanced approach to investment in equity securities, debt instruments and real estate. Due to the long‑term nature of the plan liabilities, we consider it appropriate to invest a portion of the plan assets in equity securities and in real estate to leverage the return generated by the fund.

Inflation risk The benefits payable to members of the schemes are linked to inflation measured by the RPI or CPI, subject to caps. The Group’s contributions to the schemes are based on assumptions about the future level of inflation. If inflation is higher than the levels assumed in the actuarial calculations then the Group may need to make additional contributions to the schemes in order to fund the payment of accrued benefits. The schemes use LDIs within the asset portfolios to hedge against the value of liabilities changing as a result of movements in long-term interest rate and inflation expectations. This structure allows the schemes to both hedge against these risks and retain capital investment in assets that are expected to generate higher returns.

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Notes to Group financial statements continued For the year ended 31 March 2019

28. Retirement benefit schemes continued a) Defined benefit pension schemes continued (iv) Actuarial risk factors continued Longevity risk The Group’s contributions to the schemes are based on assumptions about the life expectancy of scheme members after retirement. If scheme members live longer than assumed in the actuarial calculations then the Group may need to make additional contributions to the schemes in order to fund the payment of accrued benefits.

(v) Actuarial assumptions The major financial assumptions used in the accounting valuation of the obligations for the STPS which represents by far the largest defined benefit obligation for the Group were as follows. 2019 2018 % % Price inflation – RPI 3.2 3.1 Price inflation – CPI 2.2 2.1 Discount rate 2.5 2.7 Pension increases in payment 3.2 3.1 Pension increases in deferment 3.2 3.1

The assumption for price inflation is derived from the difference between the yields on longer term fixed rate gilts and on index-linked gilts. In setting our discount rate, we construct a yield curve. Short-dated yields are taken from market rates for AA corporate bonds. Long-dated yields for the curve are based on the average yield available on all long-dated AA corporate bonds. We project the expected cash flows of the schemes and adopt a single equivalent cash flow weighted discount rate based on this constructed yield curve. The mortality assumptions are based on those used in the latest triennial funding valuations. The mortality assumptions adopted at the year end for accounting purposes and the life expectancies at age 65 implied by the assumptions are as follows for the STPS: 2019 2018 Men Women Men Women Mortality table used S2NMA S2NFA S2NMA S2NFA Mortality table compared with standard table 95% 99% 95% 99% Mortality projections CMI 2018 CMI 2018 CMI 2017 CMI 2017 Future improvement per annum 1.0% 1.0% 1.0% 1.0% Remaining life expectancy for members currently aged 65 years 21.9 23.6 22.4 24.1 Remaining life expectancy at age 65 for members currently aged 45 years 22.9 24.8 23.4 25.3

The calculation of the scheme obligations is sensitive to the actuarial assumptions and in particular to the assumptions relating to discount rate, price inflation (capped, where relevant) and mortality. The following table summarises the estimated impact on the Group’s obligations from changes to key actuarial assumptions whilst holding all other assumptions constant. Assumption Change in assumption Impact on disclosed obligations Discount rate1 Increase/decrease by 0.1% pa Decrease/increase by £46/£47 million Price inflation2 Increase/decreased by 0.1% pa Increase/decrease by £40/£39 million Mortality3 Increase in life expectancy by 1 year Increase by £106 million

1 A change in discount rate is likely to occur as a result of changes in bond yield and as such would be expected to be offset to a significant degree by a change in the value of the bond assets held by the plans. 2 The projected impact resulting from a change in RPI reflects the underlying effect on pensions in payment, pensions in deferment and resultant increases in salary assumptions. 3 The change in assumption is based on triennial valuations and reflect the fact that life expectancy rates are expected to increase. In reality, interrelationships exist between the assumptions, particularly between the discount rate and price inflation. The above analysis does not take into account the effect of these interrelationships. Also, in practice any movement in obligations arising from assumption changes are likely to be accompanied by movements in asset values – and so the impact on the accounting deficit may be lower than the impact on the obligations shown above. In presenting the above sensitivity analysis, the present value of the defined benefit obligation has been calculated using the projected unit credit method at the end of the reporting period, which is the same as that applied in calculating the defined benefit obligation liability recognised in the balance sheet.

170 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance > Group financial statements Company financial statements Other information

28. Retirement benefit schemes continued a) Defined benefit pension schemes continued (i) Effect on future cash flows Contribution rates are set in consultation with the trustees for each scheme and each participating employer. The average duration of the benefit obligation at the end of the year is 16 years for STPS and STMIPS (2018: 17 years) and 15 years for DVWS (2018: 16 years). The most recent completed formal triennial actuarial valuations and funding agreements were carried out as at 31 March 2016 for the STPS and STMIPS schemes and 31 March 2017 for DVWS. As a result of the STPS and STMIPS actuarial valuations, deficit reduction contributions of £25 million were paid in the year ended 31 March 2017 and £10 million for each of the subsequent financial years ending 31 March 2019 were agreed. Payments of £8 million per annum through an asset-backed funding arrangement will continue to 31 March 2032. Further inflation-linked payments of £15 million per annum are being made through an additional asset-backed funding arrangement, with payments having started in the financial year ending 31 March 2018 and continuing to 31 March 2031. These contributions will cease earlier should a subsequent valuation of the STPS show that these contributions are no longer needed. b) Defined contribution pension schemes The Group also operates the Severn Trent Group Personal Pension, a defined contribution scheme, for its UK employees. The total cost charged to operating costs of £23.4 million (2018: £20.3 million) represents contributions payable to these schemes by the Group at rates specified in the rules of the scheme. As at 31 March 2019 no contributions (2018: nil) in respect of the current reporting period were owed to the schemes. Hafren Dyfrdwy operates two defined contribution pension schemes, neither of which were material in either the current or prior year. 29. Provisions for liabilities Restructuring Insurance Other Total £m £m £m £m At 1 April 2018 0.8 23.3 27.2 51.3 Charged to income statement – 5.2 7.0 12.2 Utilisation of provision (0.5) (5.1) (7.2) (12.8) Unwinding of discount – – 0.2 0.2 Acquisition of subsidiary – – 0.5 0.5 At 31 March 2019 0.3 23.4 27.7 51.4

2019 2018 £m £m Included in: Current liabilities 32.2 40.6 Non-current liabilities 19.2 10.7 51.4 51.3

The restructuring provision reflects costs to be incurred in respect of committed restructuring programmes. The associated outflows are estimated to arise over a period of up to two years from the balance sheet date. Insurance includes provisions in respect of Derwent Insurance Limited and Lyra Insurance Guernsey Limited, captive insurance companies, which are wholly owned subsidiaries of the Group, and insurance deductions in Severn Trent Water Limited. The associated outflows are estimated to arise over a period of up to five years from the balance sheet date. Other provisions include provisions for dilapidations, commercial disputes, either from continuing or discontinued operations, and potential environmental claims. The associated outflows are estimated to arise over a period up to ten years from the balance sheet date.

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Notes to Group financial statements continued For the year ended 31 March 2019

30. Share capital 2019 2018 £m £m Total issued and fully paid share capital 17 240,943,929 ordinary shares of 97 /19p (2018: 240,222,617) 235.9 235.1

At 31 March 2019, 3,774,921 treasury shares were held (2018: 3,948,599). Changes in share capital were as follows: Number £m 17 Ordinary shares of 97 /19p At 1 April 2017 239,793,915 234.7 Shares issued under the Employee Sharesave Scheme 428,702 0.4 At 1 April 2018 240,222,617 235.1 Shares issued under the Employee Sharesave Scheme 721,312 0.8 At 31 March 2019 240,943,929 235.9

31. Share premium 2019 2018 £m £m At 1 April 117.7 112.5 Share premium arising on issue of shares for Employee Sharesave Scheme 10.3 5.2 At 31 March 128.0 117.7

32. Other reserves Capital redemption Translation Hedging reserve reserve reserve Total £m £m £m £m At 1 April 2017 157.1 40.4 (75.7) 121.8 Total comprehensive (loss)/income for the year – (31.4) 11.6 (19.8) Transfer to retained earnings – (9.0) – (9.0) At 1 April 2018 157.1 – (64.1) 93.0 Total comprehensive loss for the year – – (0.2) (0.2) At 31 March 2019 157.1 – (64.3) 92.8

The capital redemption reserve arose on the redemption of B shares. The translation reserve arises from exchange differences on translation of the results and financial position of foreign subsidiaries. The hedging reserve arises from gains or losses on interest rate swaps taken directly to equity under the hedge accounting provisions of IFRS 9 and the transition rules of IFRS 1.

172 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance > Group financial statements Company financial statements Other information

33. Capital management The Group’s principal objectives in managing capital are: • to access a broad range of sources of finance to obtain both the quantum required and lowest cost compatible with the need for continued availability; • to manage exposure to movements in interest rates to provide an appropriate degree of certainty as to its cost of funds; • to minimise exposure to counterparty credit risk; • to provide the Group with an appropriate degree of certainty as to its foreign exchange exposure; • to maintain an investment grade credit rating; and • to maintain a flexible and sustainable balance sheet structure. The Group seeks to achieve a balance of long-term funding or commitment of funds across a range of funding sources at the best possible economic cost. The Group monitors future funding requirements and credit market conditions to ensure continued availability of funds. The Group has continued to carefully monitor market conditions and our interest rate exposure. Given the low, flat yield curve we believe it is the right time to start reducing our exposure to floating interest rates. At 31 March 2019, 22% of our gross debt portfolio was at floating rates, with a further 25% of index linked debt and 53% of fixed rate debt. The Group’s dividend policy is a key tool in achieving its capital management objectives. This policy is reviewed and updated in line with Severn Trent Water’s five year price control cycle and takes into account, inter alia, the planned investment programme, the appropriate gearing level achieving a balance between an efficient cost of capital and retaining an investment grade credit rating and delivering an attractive and sustainable return to shareholders. The Board has decided to set the 2018/19 dividend at 93.37 pence, an increase of 7.9% compared to the total dividend for 2017/18 of 86.55 pence. Our policy is to grow the dividend annually at no less than RPI plus 4% until March 2020. The Group’s capital at 31 March was: 2019 2018 £m £m Net cash and cash equivalents 39.6 38.5 Bank loans (1,120.1) (1,217.4) Other loans (4,820.5) (4,223.9) Finance leases (112.2) (113.9) Cross currency swaps 37.1 24.5 Loans due from joint ventures and associated undertakings 142.0 135.6 Net debt (5,834.1) (5,356.6) Equity attributable to owners of the Company (1,164.1) (996.9) Total capital (6,998.2) (6,353.5)

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Notes to Group financial statements continued For the year ended 31 March 2019

34. Fair values of financial instruments a) Fair value measurements The valuation techniques that the Group applies in determining the fair values of its financial instruments on a recurring basis are described below. The techniques are classified under the hierarchy defined in IFRS 13 which categorises valuation techniques into Levels 1– 3 based on the degree to which the fair value is observable. The Group’s valuation techniques include Levels 2 and 3 given the wide range of financial instruments below: 2019 2018 £m £m Valuation techniques and key inputs Cross currency swaps Discounted cash flow Assets 37.1 24.5 Future cash flows are estimated based on forward interest rates from observable yield curves at the period end and contract interest rates discounted at a rate that reflects the credit risk of counterparties. The currency cash flows are translated at spot rate. Interest rate swaps Discounted cash flow Assets 26.1 11.4 Future cash flows are estimated based on forward interest rates from Liabilities (119.9) (112.4) observable yield curves at the period end and contract interest rates discounted at a rate that reflects the credit risk of counterparties. Energy swaps Discounted cash flow Assets 5.3 0.3 Future cash flows are estimated based on forward electricity prices from Liabilities (0.4) (0.8) observable indices at the period end and contract prices discounted at a rate that reflects the credit risk of counterparties. Inflation swaps Discounted cash flow Liabilities (6.2) (2.8) Future cash flows on the RPI leg of the instrument are estimated based on observable forward inflation indices. Future cash flows on the CPI leg of the instrument are estimated based on the future expected differential between RPI and CPI. Both legs are discounted using observable swap rates at the period end, at a rate that reflects the credit risk of counterparties. This is considered to be a Level 3 valuation technique. Contingent consideration (3.0) – Management estimate of the amount that is likely to be payable. This is considered to be a Level 3 valuation technique. The contingent consideration arose on the acquisition of Agrivert (note 38).

Changes in the carrying values of instruments that are measured using a Level 3 technique were as follows: Inflation Contingent swaps consideration £m £m At 1 April 2017 – – Losses recognised in profit or loss (2.8) – At 31 March 2018 (2.8) – Losses recognised in profit or loss (3.4) – Recognised on acquisition of subsidiary – (3.0) At 31 March 2019 (6.2) (3.0)

174 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance > Group financial statements Company financial statements Other information

34. Fair values of financial instruments continued b) Comparison of fair value of financial instruments with their carrying amounts The Directors consider that the carrying amounts of cash and short term deposits, bank overdrafts, loans receivable from joint ventures, trade receivables and trade payables approximate their fair values. The carrying values and estimated fair values of other financial instruments are set out below: 2019 2018 Carrying value Fair value Carrying value Fair value £m £m £m £m Floating rate debt Bank loans 818.1 818.3 917.1 918.6 Currency bonds 37.9 37.9 38.2 38.2 Floating rate notes 147.7 148.0 147.7 153.0 1,003.7 1,004.2 1,103.0 1,109.8 Fixed rate debt Bank loans 184.1 183.3 185.3 185.0 Sterling bonds 2,591.1 2,956.8 2,357.0 2,700.2 Fixed rate notes 673.3 707.4 343.4 347.6 Other loans 2.8 2.8 5.3 5.3 Finance leases 112.2 119.6 113.9 122.5 3,563.5 3,969.9 3,004.9 3,360.6 Index-linked debt Bank loans 117.9 126.7 115.0 124.9 Sterling bonds 1,279.1 2,104.4 1,244.1 2,057.1 Other loans 88.6 67.2 88.2 87.1 1,485.6 2,298.3 1,447.3 2,269.1 6,052.8 7,272.4 5,555.2 6,739.5

The above classification does not take into account the impact of unhedged interest rate swaps or cross currency swaps. Fixed rate sterling and currency bonds are valued using market prices for similar instruments, which is a Level 2 valuation technique. Index-linked bonds are rarely traded and therefore quoted prices are not considered to be a reliable indicator of fair value. Therefore, these bonds are valued using discounted cash flow models with discount rates derived from observed market prices for a sample of bonds, which is a Level 3 valuation technique. Fair values of the other debt instruments are also calculated using discounted cash flow models, which is a Level 3 valuation technique.

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Notes to Group financial statements continued For the year ended 31 March 2019

35. Risks arising from financial instruments The Group’s activities expose it to a variety of financial risks: • market risk (including interest rate risk, exchange rate risk and other price risk); • credit risk; • liquidity risk; and • inflation risk. The Group’s overall risk management programme addresses the unpredictability of financial markets and seeks to reduce potential adverse effects on the Group’s financial performance or position. Financial risks are managed by a central treasury department (‘Group Treasury’) under policies approved by the Board. The Board has established a Treasury Committee to monitor treasury activities and to facilitate timely responses to changes in market conditions when necessary. Group Treasury identifies, evaluates and hedges financial risks in close co-operation with the Group’s operating units. The Board defines written principles for overall risk management, as well as written policies covering specific areas such as exchange rate risk, interest rate risk, credit risk and the use of derivative and non-derivative financial instruments. The Group’s policy is that derivative financial instruments are not held for trading but may be used to mitigate the Group’s exposure to financial risk. The types of derivative instruments held and the related risks are described below. Interest rate swaps are held to mitigate the Group’s exposure to changes in market interest rates. Further details are set out in section a) (i) and note 36 b) (i). Cross currency swaps are held to mitigate the Group’s exposure to exchange rate movements on amounts borrowed in foreign currencies. Further details are set out in section a) (ii) and 36 a) (i). Energy swaps are held to mitigate the Group’s exposure to changes in electricity prices. Further details are provided in note 36 b) (ii). Severn Trent Water, the Group’s most significant business unit, operates under a regulatory environment where its prices are linked to inflation measured by RPI. In order to mitigate the risks to cash flow and earnings arising from fluctuations in RPI, the Group holds debt instruments where the principal repayable and interest cost is linked to RPI. a) Market risk The Group is exposed to fluctuations in interest rates and, to a lesser extent, exchange rates. The nature of these risks and the steps that the Group has taken to manage them are described below.

(i) Interest rate risk The Group’s income and its operating cash flows are substantially independent of changes in market interest rates. The Group’s interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Group to the risk of adverse cash flow impacts from increases in interest rates. Borrowings issued at fixed rates expose the Group to the risk of interest costs above the market rate when interest rates decrease.

176 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance > Group financial statements Company financial statements Other information

35. Risks arising from financial instruments continued a) Market risk continued (i) Interest rate risk continued The Group’s policy is to maintain 40% to 70% of its interest bearing liabilities in fixed rate instruments during AMP6. In measuring this metric, management makes adjustments to the carrying value of debt to better reflect the amount that interest is calculated on. Details of the adjustments made are set out below: 2019 2018 £m £m Net debt (note 40) 5,834.1 5,356.6 Cash and short term deposits 41.0 51.1 Loan receivable from joint ventures and associates 142.0 135.6 Cross currency swaps included in net debt at fair value 37.1 24.5 Fair value hedge accounting adjustments (28.8) (30.4) Exchange on currency debt not hedge accounted (16.7) (8.5) Interest bearing financial liabilities 6,008.7 5,528.9

The Group manages its cash flow interest rate risk by borrowing at fixed or index-linked rates or by using interest rate swaps. Under these swaps the Group receives variable rate interest and pays fixed rate interest calculated by reference to the agreed notional principal amounts. In practice the swaps are settled by transferring the net amount. These swaps have the economic effect of converting borrowings from variable rates to fixed rates. The Group has entered into a series of these interest rate swaps to hedge future interest payments beyond 2030. The following tables show analyses of the Group’s interest bearing financial liabilities by type of interest. Debt which is hedged by interest rate swaps or cross currency swaps is included in the category after taking account of the impact of the swap. Debt raised in foreign currencies has been included at the notional sterling value of the payable leg of the corresponding cross currency swap since this is the amount that is exposed to changes in interest rates. Valuation adjustments that do not impact the amount on which interest is calculated, such as fair value hedge accounting adjustments, are excluded from this analysis. The net principal amount of unhedged swaps is shown as an adjustment to floating rate and fixed rate debt to demonstrate the impact of the swaps on the amount of liabilities bearing fixed interest. Floating Fixed rate rate Index-linked Total 2019 £m £m £m £m Overdrafts (1.4) – – (1.4) Bank loans (818.1) (184.1) (117.9) (1,120.1) Other loans (169.1) (3,238.3) (1,367.6) (4,775.0) Finance leases – (112.2) – (112.2) (988.6) (3,534.6) (1,485.5) (6,008.7) Impact of swaps not matched against specific debt instruments (348.4) 348.4 – – Interest bearing financial liabilities (1,337.0) (3,186.2) (1,485.5) (6,008.7) Proportion of interest bearing financial liabilities that are fixed 53% Weighted average interest rate of fixed debt 4.19% Weighted average period for which interest is fixed (years) 8.8

Floating Fixed rate rate Index-linked Total 2018 £m £m £m £m Overdrafts (12.6) – – (12.6) Bank loans (917.1) (185.3) (115.0) (1,217.4) Other loans (167.6) (2,685.0) (1,332.3) (4,184.9) Finance leases – (113.9) – (113.9) (1,097.3) (2,984.2) (1,447.3) (5,528.8) Impact of swaps not matched against specific debt instruments (349.6) 349.6 – – Interest bearing financial liabilities (1,446.9) (2,634.6) (1,447.3) (5,528.8) Proportion of interest bearing financial liabilities that are fixed 48% Weighted average interest rate of fixed debt 4.30% Weighted average period for which interest is fixed (years) 8.8

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Notes to Group financial statements continued For the year ended 31 March 2019

35. Risks arising from financial instruments continued a) Market risk continued (i) Interest rate risk continued Interest rate swaps not hedge accounted The Group has a number of interest rate swaps which are not accounted for as cash flow or fair value hedges. This has led to a credit of £19.7 million (2018: £7.9 million) in the income statement. Average contract fixed interest rate Notional principal amount Fair value 2019 2018 2019 2018 2019 2018 % % £m £m £m £m Pay fixed rate interest 2 – 5 years 4.98 – (150.0) – (25.8) – 5 – 10 years 5.14 5.06 (150.0) (300.0) (34.9) (65.6) 10 – 20 years 5.45 5.46 (75.0) (73.7) (33.5) (32.6) 5.13 5.1 6 (375.0) (373.7) (94.2) (98.2) Receive fixed rate interest 5 – 10 years 3.36 3.36 225.0 225.0 15.8 11.4 10 – 20 years 2.75 2.75 400.0 400.0 10.4 (0.6) 2.97 3.01 625.0 625.0 26.2 10.8 250.0 251.3 (68.0) (87.4)

Interest rate sensitivity analysis The sensitivity after tax of the Group’s profits, cash flow and equity, including the impact on derivative financial instruments, to changes in interest rates at 31 March is as follows: 2019 2018 +1.0% -1.0% +1.0% -1.0% £m £m £m £m Profit or loss (48.5) 54.3 (47.7) 53.9 Cash flow (10.8) 10.8 (11.5) (11.5) Equity (48.5) 54.3 (47.7) 53.9

(ii) Exchange rate risk Except for debt raised in foreign currency, which is hedged, the Group’s business does not involve significant exposure to foreign exchange transactions. Substantially all of the Group’s profits and net assets arise from Severn Trent Water, which has very limited and indirect exposure to changes in exchange rates, and therefore the sensitivity of the Group’s results to changes in exchange rates is not material. Certain of the Group’s subsidiaries enter into transactions in currencies other than the functional currency of the operation. Exchange risks relating to such operations are not material but are managed centrally by Group Treasury through forward exchange contracts to buy or sell currency. These contracts led to a no charge (2018: nil) in the income statement. In order to meet its objective of accessing a broad range of sources of finance, the Group has raised debt denominated in currencies other than sterling. In order to mitigate the Group’s exposure to exchange rate fluctuations, cross currency swaps were entered into at the time that the debt was drawn down to swap the proceeds into sterling debt bearing interest based on LIBOR. Where the terms of the receivable leg of the swap closely match the terms of the underlying debt, the swaps are expected to be effective hedges, hence the swaps have been accounted for as fair value hedges. The notional values and fair values of these swaps are shown in note 36 a). The Group also has cross currency swaps with a sterling value of £98.3 million (2018: £98.3 million) which are not accounted for as fair value hedges. Economically these swaps act to mitigate the exchange rate risk of debt within the Group which is denominated in foreign currency, but they are not designated hedges under IFRS 9. This has led to a credit of £12.2 million (2018: charge of £17.7 million) in the income statement which is partly offset by the exchange loss of £8.6 million (2018: exchange gain of £12.7 million) on the underlying debt.

178 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance > Group financial statements Company financial statements Other information

35. Risks arising from financial instruments continued a) Market risk continued (ii) Exchange rate risk continued The Group’s gross and net currency exposures arising from currency borrowings are summarised in the tables below. These show, in the relevant currency, the amount borrowed and the notional principal of the related swap or forward contract. The net position shows the Group’s exposure to exchange rate risk in relation to its currency borrowings. Euro US dollar Yen 2019 €m $m ¥bn Borrowings by currency (20.1) (180.0) (2.0) Cross currency swaps – hedge accounted 19.9 30.0 2.0 Cross currency swaps – not hedge accounted – 150.0 – Net currency exposure (0.2) – –

Euro US dollar Yen 2018 €m $m ¥bn Borrowings by currency (20.2) (150.0) (2.0) Cross currency swaps – hedge accounted 19.9 – 2.0 Cross currency swaps – not hedge accounted – 150.0 – Net currency exposure (0.3) – – b) Credit risk Operationally the Group has no significant concentrations of credit risk. It has policies in place to ensure that sales of products are made to customers with an appropriate credit history, other than in Severn Trent Water Limited and Hafren Dyfrdwy Cyfyngedig, whose operating licences oblige them to supply domestic customers even in cases where bills are not paid. Amounts provided against accounts receivable and movements on the provision during the year are disclosed in note 21. Cash deposits and derivative contracts are only placed with high credit quality financial institutions, which have been approved by the Board. Group Treasury monitors the credit quality of the approved financial institutions and the list of financial institutions that may be used is approved annually by the Board. The Group has policies that limit the amount of credit exposure to any one financial institution.

Credit risk analysis At 31 March the aggregate credit limits of authorised counterparties and the amounts held on short-term deposits were as follows: Amount Credit limit deposited 2019 2018 2019 2018 £m £m £m £m Double A range 105.0 105.0 – – Single A range 700.0 650.0 – 11.1 Triple B range – 10.0 – 5.3 805.0 765.0 – 16.4

The fair values of derivative assets analysed by credit ratings of counterparties were as follows: Derivative assets 2019 2018 £m £m Double A range 1.4 – Single A range 67.1 36.2 68.5 36.2

Severn Trent Plc Annual Report and Accounts 2019 179 Group financial statements

Notes to Group financial statements continued For the year ended 31 March 2019

35. Risks arising from financial instruments continued c) Liquidity risk (i) Committed facilities Prudent liquidity management requires sufficient cash balances to be maintained; adequate committed facilities to be available; and the ability to close out market positions. Group Treasury manages liquidity and flexibility in funding by monitoring forecast and actual cash flows and the maturity profile of financial assets and liabilities, and by keeping committed credit lines available. At the balance sheet date the Group had committed undrawn borrowing facilities expiring as follows: 2019 2018 £m £m 2 – 5 years 885.0 710.0

(ii) Cash flows from non-derivative financial instruments The following tables show the estimated cash flows that will arise from the Group’s non-derivative net financial liabilities. The information presented is based on the earliest date on which the Group can be required to pay and represents the undiscounted cash flows including principal and interest. Interest and inflation assumptions are based on prevailing market conditions at the year end date.

2019

Payments on financial Floating rate Fixed rate Index-linked Trade payables liabilities Undiscounted amounts payable: £m £m £m £m £m Within 1 year (202.2) (122.8) (28.8) (32.2) (386.0) 1 – 2 years (14.4) (276.4) (30.9) – (321.7) 2 – 5 years (352.3) (1,165.6) (321.6) – (1,839.5) 5 – 10 years (469.2) (1,359.6) (412.3) – (2,241.1) 10 – 15 years (50.8) (1,206.0) (217.9) – (1,474.7) 15 – 20 years – (246.1) (145.6) – (391.7) 20 – 25 years – (413.4) (176.3) – (589.7) 25 – 30 years – – (208.5) – (208.5) 30 – 35 years – – (652.7) – (652.7) 35 – 40 years – – (3,248.6) – (3,248.6) 40 – 45 years – – (22.8) – (22.8) 45 – 50 years – – (358.6) – (358.6) Total (1,088.9) (4,789.9) (5,824.6) (32.2) (11,735.6)

Trade Loans due from and other Cash and short Receipts from joint ventures receivables term deposits financial assets Undiscounted amounts receivable: £m £m £m £m Within 1 year – 496.9 41.0 537.9 1 – 2 years 142.0 47.6 – 189.6 Total 142.0 544.5 41.0 727.5

180 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance > Group financial statements Company financial statements Other information

35. Risks arising from financial instruments continued c) Liquidity risk continued (ii) Cash flows from non-derivative financial instruments continued 2018 Payments on financial Floating rate Fixed rate Index-linked Trade payables liabilities Undiscounted amounts payable: £m £m £m £m £m Within 1 year (311.4) (136.0) (27.8) (18.9) (494.1) 1 – 2 years (10.3) (116.1) (29.4) – (155.8) 2 – 5 years (41.3) (982.6) (325.7) – (1,349.6) 5 – 10 years (785.3) (1,333.6) (199.9) – (2,318.8) 10 – 15 years (52.7) (1,056.0) (436.2) – (1,544.9) 15 – 20 years – (60.9) (139.0) – (199.9) 20 – 25 years – (298.8) (167.7) – (466.5) 25 – 30 years – – (199.2) – (199.2) 30 – 35 years – – (649.7) – (649.7) 35 – 40 years – – (2,273.6) – (2,273.6) 40 – 45 years – – (1,068.1) – (1,068.1) 45 – 50 years – – (374.2) – (374.2) Total (1,201.0) (3,984.0) (5,890.5) (18.9) (11,094.4)

Loans due from Trade Cash and short Receipts from joint ventures receivables term deposits financial assets Undiscounted amounts receivable: £m £m £m £m Within 1 year – 191.0 51.1 242.1 1 – 2 years 126.3 – – 126.3 5 – 10 years 12.5 – – 12.5 Total 138.8 191.0 51.1 380.9

Index-linked debt includes loans with maturities up to 50 years. The principal is revalued at fixed intervals and is linked to movements in the RPI. Interest payments are made biannually based on the revalued principal. The principal repayment equals the revalued amount at maturity. The payments included in the table above are estimates based on the forward inflation rates published by the Bank of England at the balance sheet date.

Severn Trent Plc Annual Report and Accounts 2019 181 Group financial statements

Notes to Group financial statements continued For the year ended 31 March 2019

35. Risks arising from financial instruments continued c) Liquidity risk continued (iii) Cash flows from derivative financial instruments The following tables show the estimated cash flows that will arise from the Group’s derivative financial instruments. The tables are based on the undiscounted net cash inflows/(outflows) on the derivative financial instruments that settle on a net basis and the undiscounted gross inflows/(outflows) on those derivatives that require gross settlement. When the amount payable or receivable is not fixed, the amount disclosed has been determined by reference to the projected interest and foreign currency rates derived from the forward curves existing at the balance sheet date. Actual amounts may be significantly different from those indicated below. Derivative liabilities Derivative assets Cross currency swaps Interest rate Inflation Energy Interest rate Energy Cash Cash swaps swaps swaps swaps swaps receipts payments Total 2019 £m £m £m £m £m £m £m £m Within 1 year (28.6) – – 16.7 0.1 6.2 (3.2) (8.8) 1 – 2 years (15.6) – – 0.3 0.6 6.2 (3.2) (11.7) 2 – 5 years (44.9) (0.3) (0.4) 0.6 4.7 18.3 (9.7) (31.7) 5 – 10 years (31.8) (1.7) – 0.4 – 164.7 (144.1) (12.5) 10 – 15 years (7.5) (2.5) – (0.1) – 16.9 (8.6) (1.8) 15 – 20 years – 10.4 – – – – – 10.4 (128.4) 5.9 (0.4) 17.9 5.4 212.3 (168.8) (56.1)

Derivative liabilities Derivative assets Cross currency swaps Interest rate Inflation Energy Interest rate Energy Cash Cash swaps swaps swaps swaps swaps receipts payments Total 2018 £m £m £m £m £m £m £m £m Within 1 year (14.9) – – 5.1 0.2 1.1 (0.2) (8.7) 1 – 2 years (14.3) – – 1.7 – 1.1 (0.3) (11.8) 2 – 5 years (47.5) 0.2 (0.8) 3.5 0.1 3.4 (1.1) (42.2) 5 – 10 years (35.8) 0.8 – 3.9 – 23.3 (13.0) (20.8) 10 – 15 years (13.0) 1.6 – – – 17.5 (8.8) (2.7) 15 – 20 years – (6.7) – – – – – (6.7) (125.5) (4.1) (0.8) 14.2 0.3 46.4 (23.4) (92.9) d) Inflation risk The Group’s principal operating subsidiary, Severn Trent Water Limited, operates under a regulatory environment where its prices are linked to inflation measured by RPI. Its operating profits and cash flows are therefore exposed to changes in RPI. In order to mitigate and partially offset this risk, Severn Trent Water has raised debt which pays interest at a fixed coupon based on a principal amount that is adjusted for the change in RPI during the life of the debt instrument (‘index-linked debt’). The amount of index-linked debt at the balance sheet date is shown in section a) (i) interest rate risk, and the estimated future cash flows relating to this debt are shown in section c) (ii) cash flows from non-derivative financial instruments. Ofwat has announced its plans to move towards an economic regulatory model linked to inflation measured on the CPIH index over a period of time. In anticipation of this the Group has entered into CPI/RPI swaps with a notional value of £250 million (2018: £150 million) in order to mitigate the risk of divergence between inflation measured by CPIH and that measured by RPI.

Inflation rate sensitivity analysis The finance cost of the Group’s index-linked debt instruments varies with changes in RPI rather than interest rates. The sensitivity at 31 March of the Group’s profit and equity to changes in RPI is set out in the following table. This analysis relates to financial instruments only and excludes any RPI impact on Severn Trent Water’s revenues and Regulatory Capital Value, or accounting for defined benefit pension schemes. 2019 2018 +1.0% -1.0% +1.0% -1.0% £m £m £m £m Profit or loss (10.6) 10.6 (11.7) 11.7 Equity (10.6) 10.6 (11.7) 11.7

182 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance > Group financial statements Company financial statements Other information

36. Hedge accounting The Group uses derivative financial instruments to hedge exposures to changes in exchange rates and interest rates. Hedge accounting is adopted for such instruments where the criteria set out in IFRS 9 are met. a) Fair value hedges (i) Cross currency swaps The Group raises debt denominated in currencies other than sterling. Cross currency swaps are entered into at the time that the debt is drawn down to swap the proceeds into sterling debt bearing interest based on LIBOR in order to mitigate the Group’s exposure to exchange rate fluctuations. Where the terms of the receivable leg of the swap closely match the terms of the underlying debt, the swaps are expected to be effective hedges. At the year end the amounts of cross currency swaps designated as fair value hedges were as follows: Notional principal amount Fair value 2019 2018 2019 2018 £m £m £m £m Euro 11.4 11.4 10.1 10.4 US dollar 23.2 – 0.2 – Yen 8.5 8.5 8.8 8.3 43.1 19.9 19.1 18.7 b) Cash flow hedges (i) Interest rate swaps The Group has entered into interest rate swaps under which it has agreed to exchange the difference between fixed and floating interest rate amounts calculated on agreed notional principal amounts. Such contracts enable the Group to mitigate the risk of changing interest rates on future cash flow exposures arising from issued variable rate debt. Where the hedge is expected to be highly effective these interest rate swaps are accounted for as cash flow hedges. Details of interest rate swaps that have been accounted for as cash flow hedges are summarised below: Average contract fixed interest rate Notional principal amount Fair value 2019 2018 2019 2018 2019 2018 Period to maturity % % £m £m £m £m 5 – 10 years 2.63 2.63 135.2 135.2 (10.9) (8.6) 10 – 20 years 1.83 1.83 298.0 298.0 (14.8) (5.0) 2.08 2.08 433.2 433.2 (25.7) (13.6)

Severn Trent Plc Annual Report and Accounts 2019 183 Group financial statements

Notes to Group financial statements continued For the year ended 31 March 2019

36. Hedge accounting continued b) Cash flow hedges continued (ii) Energy swaps The Group has entered into a series of energy swaps under which it has agreed to exchange the difference between fixed and market prices of electricity at six-monthly intervals up to March 2025. Details of energy swaps that have been accounted for as cash flow hedges are summarised below: Average contract price Notional contracted amount Fair value 2019 2018 2019 2018 2019 2018 Period to maturity £/MWh £/MWh MWh MWh £m £m Less than 1 year 48.6 47.6 21,955 43,680 0.1 0.2 1 – 2 years 44.7 48.6 372,240 21,955 2.0 – 2 – 5 years 43.7 40.5 788,280 547,460 2.7 (0.7) 5 – 10 years 47.7 – 43,680 – 0.1 – 44.2 41.3 1,226,155 613,095 4.9 (0.5)

37. Share based payment The Group operates a number of share based remuneration schemes for employees. During the year, the Group recognised total expenses of £8.1 million (2017/18: £6.9 million) related to equity settled share based payment transactions. The weighted average share price during the year was £19.27 (2017/18: £21.25). At 31 March 2019, there were no options exercisable (2018: none) under any of the share based remuneration schemes. a) Long Term Incentive Plan Under the Long Term Incentive Plan (‘LTIP’), conditional awards of shares may be made to Executive Directors and senior staff. Awards are subject to performance conditions and continued employment throughout the vesting period.

(i) Awards made under the LTIP The 2015, 2016, 2017 and 2018 LTIP awards are subject to Severn Trent Water’s achievement of Return on Regulated Equity in excess of the level included in the Severn Trent Water AMP6 business plan over a three year vesting period. It has been assumed that performance against the LTIP non-market conditions will be 100% (2018: 100%).

(ii) Awards outstanding Details of changes in the number of awards outstanding during the year are set out below: Number of awards Opening at 1 April 2017 517,474 Granted during the year 203,035 Vested during the year (139,829) Lapsed during the year (31,906) Outstanding at 1 April 2018 548,774 Granted during the year 272,057 Vested during the year (159,463) Lapsed during the year (35,945) Outstanding at 31 March 2019 625,423

Details of LTIP awards outstanding at 31 March were as follows: Number of awards Normal date of Date of grant vesting 2019 2018 July 2015 2018 – 160,028 July 2016 2019 175,543 188,131 July 2017 2020 181,070 200,615 July 2018 2021 268,810 625,423 548,774

Details of the basis of the LTIP scheme are set out in the Directors’ remuneration report on pages 97 to 122.

184 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance > Group financial statements Company financial statements Other information

37. Share based payment continued b) Employee Sharesave Scheme Under the terms of the Sharesave Scheme, the Board may grant the right to purchase ordinary shares in the Company to those employees who have entered into an HMRC approved Save As You Earn contract for a period of three or five years.

(i) Options outstanding Details of changes in the number of options outstanding during the year are set out below: Weighted Number of average share options exercise price Outstanding at 1 April 2017 3,106,607 1,572p Granted during the year 1,087,376 1,652p Forfeited during the year (46,715) 1,636p Cancelled during the year (134,768) 1,665p Exercised during the year (428,702) 1,306p Lapsed during the year (8,867) 1,367p Outstanding at 1 April 2018 3,574,931 1,625p Granted during the year 1,331,044 1,474p Forfeited during the year (58,285) 1,663p Cancelled during the year (405,861) 1,654p Exercised during the year (721,312) 1,532p Lapsed during the year (6,000) 1,575p Outstanding at 31 March 2019 3,714,517 1,585p

Sharesave options outstanding at 31 March were as follows: Number of awards Normal date Date of grant of exercise Option price 2019 2018 January 2013 2018 1,241p – 110,447 January 2014 2017 or 2019 1,331p 144,212 151,528 January 2015 2018 or 2020 1,584p 227,212 846,002 January 2016 2019 or 2021 1,724p 556,447 621,971 January 2017 2020 or 2022 1,663p 662,545 781,782 January 2018 2021 or 2023 1,652p 804,957 1,063,201 January 2019 2022 or 2024 1,474p 1,319,144 – 3,714,517 3,574,931 c) Fair value calculations The fair values of the share awards made and share options granted during the year were calculated using the Black-Scholes method. The principal assumptions and data are set out below: 2019 2018 LTIP SAYE LTIP SAYE 3 year scheme 5 year scheme 3 year scheme 5 year scheme Share price at grant date (pence) 1,884 1,849 1,849 2,341 2,138 2,138 Option life (years) 3 3.5 5.5 3 3.5 5.5 Vesting period (years) 3 3 5 3 3 5 Expected volatility (%) 18.2 18.2 18.2 18.2 18.2 18.2 Expected dividend yield (%) 4.0 4.0 4.0 4.1 4.1 4.1 Risk free rate (%) n/a 0.6 0.8 n/a 0.5 0.8 Fair value per share (pence) 1,866 303 284 2,328 375 351

Expected volatility is measured over the three years prior to the date of grant of the awards or share options. Volatility has been calculated based on historical share price movements. The risk free rate is derived from yields at the grant date of gilts of similar duration to the awards or share options. The dividend yield is calculated using the expected dividend for the year divided by the share price at the date of grant.

Severn Trent Plc Annual Report and Accounts 2019 185 Group financial statements

Notes to Group financial statements continued For the year ended 31 March 2019

38. Acquisitions On 30 November 2018, Severn Trent Green Power Limited acquired 100% of the issued share capital of Agrivert Holdings Limited for the total consideration of £61.3 million and the assumption of £59.7 million of existing debt. Agrivert’s UK operations have been added to Severn Trent Green Power’s existing business and will complement our two operating food waste anaerobic digestion plants at Coleshill and Roundhill and one under construction in Derby. The acquisition has added 105 GWh of energy generation per annum, increasing the Group’s energy generating capacity by around 30%. The acquisition has been accounted for using the acquisition method. Goodwill of £28.7 million has been capitalised attributable to the anticipated future opportunities and outperformance arising as a result of the acquisition. No goodwill related to this acquisition is expected to be deductible for tax purposes. The residual excess over the net assets acquired has been recognised as goodwill. £m Provisional fair values on acquisition Intangible assets 31.5 Property, plant and equipment 69.4 Inventory 0.6 Trade and other receivables 9.4 Cash and cash equivalents 3.3 Borrowings (63.0) Trade and other payables (4.9) Provisions for liabilities (0.5) Deferred tax (13.2) Net assets acquired 32.6 Goodwill 28.7 Total consideration 61.3 Satisfied by: Cash 54.2 Deferred consideration 4.1 Contingent consideration 3.0 61.3 Net cash flows arising on acquisition: Cash consideration (54.2) Cash and cash equivalents acquired 3.3 (50.9) Agrivert Group Limited for the period since acquisition to 31 March 2019: Revenue 9.2 Profit before tax 0.9 Severn Trent Group for the year ended 31 March 2019 if acquisition happened on 1 April 2018: Revenue 1,793.7 Profit before tax 385.7

As outlined by IFRS 3, management has until the earliest of the date at which all information required is received or one year from the acquisition date in order to satisfy the measurement period criteria. The fair values are provisional. Acquisition-related costs amounting to £3.6 million were recognised as an expense in the income statement. No other acquisition costs were recognised. Contingent consideration is payable if the vendor obtains an extension to a lease agreement relating to one of the acquired Group’s operating sites within two years of the acquisition date. The range of amounts payable is nil to £3 million. See note 16 for the reconciliation of goodwill recognised for the Group.

186 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance > Group financial statements Company financial statements Other information

39. Discontinued operations

Operating Services US The disposal of the Group’s US business (Operating Services, US), which formed part of the Business Services segment, to US investors PPC Enterprises LLC and Alston Capital Partners LLC, was completed on 30 June 2017. The results of discontinued operations are disclosed separately in the income statement and comprise: 2019 2018 £m £m Turnover – 42.1 Total operating costs – (42.2) Loss before interest and tax – (0.1) Net finance income – – Loss before tax – (0.1) Attributable tax expense – 0.3 Gain on disposal of discontinued operations – 13.0 Profit for the period attributable to owners of the Company – 13.2

Basic and diluted earnings per share from discontinued operations are as follows: 2019 2018 Profit Weighted Profit Weighted attributable to average attributable to average owners of the number of Per share owners of the number of Per share Company shares amount Company shares amount £m m pence £m £m pence Basic earnings per share – – – 13.2 235.3 5.6 Diluted earnings per share – – – 13.2 236.1 5.6

Net cash flows arising from the discontinued operations in the year were: 2019 2018 £m £m Net cash flows attributable to: operating activities – 1.9 investing activities – (0.6) financing activities – – – 1.3

The net gain on disposals is calculated as follows: 2018 Operating Services US £m Consideration 47.8 Net assets attributable to owners of the Company (45.5) 2.3 Tax on gain on disposal (0.7) Disposal costs and provisions on disposal (18.4) Foreign exchange gain recycled from reserves 29.8 Net gain on disposal 13.0

The net assets of the business at the date of disposal, all of which were attributable to the owners of the Company, were: 2018 Operating Services US £m Goodwill 14.4 Other intangible assets 2.9 Property, plant and equipment 9.4 Inventory 0.6 Trade and other receivables 28.2 Cash and bank balances 9.9 Trade and other payables (19.9) Net assets attributable to owners of the Company 45.5

Severn Trent Plc Annual Report and Accounts 2019 187 Group financial statements

Notes to Group financial statements continued For the year ended 31 March 2019

39. Discontinued operations continued The net cash flows arising from disposals were: 2018 £m Consideration received in cash and cash equivalents 39.3 Disposal costs paid in cash and cash equivalents (4.3) Cash and bank balances disposed of (9.9) 25.1

40. Cash flow statement a) Reconciliation of operating profit to operating cash flows

2019 2018 (restated) £m £m Profit before interest and tax from continuing operations 563.3 527.2 Profit before interest and tax from discontinued operations – 13.6 Profit before interest and tax 563.3 540.8 Depreciation of property, plant and equipment 315.4 308.8 Amortisation of intangible assets 30.5 20.8 Pension service cost 9.8 (7.8) Defined benefit pension scheme administration costs 2.3 1.8 Defined benefit pension scheme contributions (34.9) (35.2) Share based payment charge 8.1 6.9 Loss/(profit) on sale of property, plant and equipment and intangible assets 0.6 (7.3) Exceptional depreciation – property, plant and equipment – 16.8 Profit on disposal of businesses – (13.7) Deferred income credit to the income statement (14.7) (14.3) Provisions charged to the income statement 12.2 13.8 Utilisation of provisions for liabilities (12.8) (5.4) Operating cash flows before movements in working capital 879.8 826.0 Increase in inventory (1.7) (2.9) Increase in amounts receivable (60.0) (58.4) Increase in amounts payable 8.2 8.6 Cash generated from operations 826.3 773.3 Tax received – 8.0 Tax paid (21.3) (14.5) Net cash generated from operating activities 805.0 766.8 b) Non-cash transactions No additions to property, plant and equipment during the year were financed by new finance leases (2018: nil). Assets transferred from developers at no cost were recognised at their fair value of £42.1 million (2018: £35.3 million). c) Reconciliation of movement in cash and cash equivalents to movement in net debt

Net cash Cross Loans due and cash Bank Other Finance currency from joint Net equivalents loans loans leases swaps ventures debt £m £m £m £m £m £m £m As at 1 April 2018 38.5 (1,217.4) (4,223.9) (113.9) 24.5 135.6 (5,356.6) Cash flow (2.2) 163.5 (551.8) 2.3 – 6.0 (382.2) Fair value adjustments – – 1.6 – 12.6 – 14.2 RPI uplift on index-linked debt – (2.9) (36.8) – – – (39.7) Debt acquired on acquisition 3.3 (62.4) – (0.6) – – (59.7) Foreign exchange – – (8.1) – – – (8.1) Other non-cash movements – (0.9) (1.5) – – 0.4 (2.0) As at 31 March 2019 39.6 (1,120.1) (4,820.5) (112.2) 37.1 142.0 (5,834.1)

Liabilities from financing activities comprise bank loans, other loans and finance leases.

188 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance > Group financial statements Company financial statements Other information

41. Contingent liabilities

Bonds and guarantees Group undertakings have entered into bonds and guarantees in the normal course of business. No liability (2018: nil) is expected to arise in respect of either bonds or guarantees. 42. Financial and other commitments a) Investment expenditure commitments

2019 2018 £m £m Contracted for but not authorised in the financial statements 359.2 395.0

In addition to these contractual commitments, Severn Trent Water Limited has longer term expenditure plans which include investments to achieve improvements in performance mandated by Ofwat and to provide for growth in demand for water and waste water services. b) Leasing commitments At the balance sheet date the Group had outstanding operating commitments for future minimum operating lease payments under non-cancellable operating leases, which fall due as follows: 2019 2018 £m £m Within 1 year 2.8 1.1 1 – 5 years 4.2 2.4 After more than 5 years 10.5 4.8 17.5 8.3

Operating lease payments represent rentals by the Group for certain of its office property, plant and equipment. 43. Post balance sheet events Following the year end the Board of Directors have proposed a final dividend of 56.02 pence per share. Further details of this are shown in note 14. 44. Related party transactions Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not included in this note. Trading transactions between the Group and its joint venture, Water Plus, are disclosed below. Water Plus 2019 2018 £m £m Sale of services 335.0 354.9 Net interest income 3.8 2.4 338.8 357.3

Outstanding balances between the Group and the joint venture as at 31 March were as follows: Water Plus 2019 2018 £m £m Trade and other receivables due from related parties 2.3 44.9 Loans receivable from joint ventures 142.0 135.6 144.3 180.5

The retirement benefit schemes operated by the Group are considered to be related parties. Details of transactions and balances with the retirement benefit schemes are disclosed in note 28.

Severn Trent Plc Annual Report and Accounts 2019 189 Group financial statements

Notes to Group financial statements continued For the year ended 31 March 2019

44. Related party transactions continued

Remuneration of key management personnel Key management personnel comprise the members of STEC during the year. The remuneration of the Directors is included within the amounts disclosed below. Further information about the remuneration of individual Directors is provided in the audited part of the Directors’ remuneration report on pages 117 to 122. 2019 2018 £m £m Short-term employee benefits 6.5 6.4 Share based payment 2.9 3.5 9.4 9.9

45. Alternative performance measures Financial measures or metrics used in this report that are not defined by IFRS are alternative performance measures (’APMs’). The Group uses such measures for performance analysis because they provide additional useful information on the performance and position of the Group. Since the Group defines its own APMs, these might not be directly comparable with other companies’ APMs. These measures are not intended to be a substitute for, or superior to, IFRS measurements. a) Exceptional items Exceptional items are income or expenditure which individually or, if of a similar type, in aggregate should, in the opinion of the directors, be disclosed by virtue of their size or nature if the financial statements are to give a true and fair view. In this context, materiality is assessed at the segment level. b) Underlying PBIT Underlying profit before interest and tax is profit before interest and tax excluding exceptional items as recorded in the income statement and amortisation of intangible assets recognised on acquisition of subsidiaries. This provides a measure of operating performance excluding distortions caused by exceptional items and reflecting the operational performance of the acquired subsidiaries. Following the acquisition of Agrivert this APM was updated to include adjustment of amortisation on acquired intangible assets. The calculation of this APM is shown on the face of the income statement and in note 5 for reportable segments. c) Underlying earnings per share Underlying earnings per share figures are presented for continuing operations. These exclude the effects of exceptional items, amortisation of acquired intangible assets, net gains/losses on financial instruments, current tax on exceptional items and on net gains/losses on financial instruments and deferred tax. The Directors consider that the underlying figures provide a useful additional indicator of performance and remove non-performance related distortions. See note 15. d) Net debt Net debt comprises borrowings including remeasurements for changes in fair value of amounts in fair value hedging relationships, cross currency swaps that are used to fix the sterling liability of foreign currency borrowings (whether hedge accounted or not), net cash and cash equivalents, and loans to joint ventures. See note 40. e) Effective interest rate The effective interest rate is calculated as net finance costs, excluding net finance costs from pensions, plus capitalised finance costs divided by the monthly average net debt during the year. (net finance costs – net finance costs from pensions + capitalised finance costs) (monthly average net debt) 2019 2018 £m £m Net finance costs 194.2 219.5 Net finance costs from pensions (13.8) (15.5) Capitalised interest 33.2 26.2 213.6 230.2

Average net debt 5,547.7 5,134.4

Effective interest rate 3.9% 4.5%

This APM is used as it shows the average interest rate that is attributable to the net debt of the business.

190 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance > Group financial statements Company financial statements Other information

45. Alternative performance measures continued f) Effective cash cost of interest The effective cash cost of interest is calculated on the same basis as the effective interest rate except that it excludes finance costs that are not paid in cash but are accreted to the carrying value of the debt (principally RPI adjustments on index-linked debt). (net finance costs – net finance costs from pensions – RPI interest + capitalised finance costs) (monthly average net debt) 2019 2018 £m £m Net finance costs 194.2 219.5 Net finance costs from pensions (13.8) (15.5) RPI interest (38.0) (54.1) Capitalised interest 33.2 26.2 175.6 176.1

Average net debt 5,547.7 5,134.4

Effective cash cost of interest 3.2% 3.4%

This is used as it shows the average cash interest rate based on the net debt of the business. g) PBIT interest cover The ratio of items underlying PBIT (see (b) above) to net finance costs excluding net finance costs from pensions. underlying PBIT (net finance costs – net finance costs from pensions) 2019 2018 (restated) £m £m Underlying PBIT 573.6 539.8

Net finance costs 194.2 219.5 Net finance costs from pensions (13.8) (15.5) Net finance costs excluding finance costs from pensions 180.4 204.0

PBIT interest cover ratio 3.2 2.6

This is used to show how the underlying PBIT of the business covers the financing costs associated only with net debt on a consistent basis.

Severn Trent Plc Annual Report and Accounts 2019 191 Group financial statements

Notes to Group financial statements continued For the year ended 31 March 2019

45. Alternative performance measures continued h) EBITDA and EBITDA interest cover The ratio of profit from continuing operations before interest, tax, exceptional items, depreciation and amortisation to net finance costs excluding net finance costs from pensions. (underlying PBIT + depreciation + amortisation) (net finance costs – net finance costs from pensions) 2018 2019 (restated) £m £m Underlying PBIT 573.6 539.8 Depreciation 315.4 308.2 Amortisation (excluding amortisation of intangible assets recognised on acquisition of subsidiaries) 29.8 20.5 EBITDA 918.8 868.5

Net finance costs 194.2 219.5 Net finance costs from pensions (13.8) (15.5) Net finance costs excluding finance costs from pensions 180.4 204.0

EBITDA interest cover ratio 5.1 4.3

This is used to show how the EBITDA of the business covers the financing costs associated only with net debt on a consistent basis. i) Underlying effective current tax rate Current tax charge for the year on continuing operations, excluding prior year charges, current tax on exceptional items and on financial instruments, divided by profit from continuing operations before tax, net gains/losses on financial instruments, exceptional items, and share of net profit of joint ventures accounted for using the equity method. (current year current tax charge in the income statement – tax on exceptional items – tax on financial instruments) (PBT – share of net profit of JVs – exceptional items – net losses on financial instruments) 2019 2018 (restated) Current tax Current tax theron theron £m £m £m £m Profit before tax 384.7 (41.2) 301.2 (36.8) Adjustments Share of net loss/(profit) of joint ventures 0.4 – (0.2) – Exceptional items 9.6 – 12.6 (0.7) Net (gains)/losses on financial instruments (16.0) (2.6) 6.7 (3.3) 378.7 (43.8) 320.3 (40.8) Underlying effective current tax rate 11.6% 12.7%

This APM is used to remove distortions in the tax charge and create a metric consistent with the calculation of underlying earnings per share in note 15. Share of net profit of joint ventures is excluded from the calculation because this is included after tax and the tax on joint venture profits is therefore not included in the current tax charge.

192 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance > Group financial statements Company financial statements Other information

46. Subsidiary undertakings Details of all subsidiary undertakings as at 31 March 2019 are given below. Details of the joint venture are set out in note 19. All subsidiary undertakings have been included in the consolidation. Country of operation Percentage of Class of share Owned directly by Severn Trent Plc and incorporation share capital held capital held Severn Trent Investment Holdings Limited United Kingdom 100% Ordinary The following subsidiary undertakings all operate and are incorporated in the United Kingdom. The percentage of share capital held is 100% and the class of share capital held is ordinary. All subsidiary undertakings Aqua Deva Limited Severn Trent Green Power Composting Limited Charles Haswell and Partners Limited Severn Trent Green Power Group Limited Chester Water Limited Severn Trent Green Power Holdings Limited Debeo Debt Recovery Limited Severn Trent Green Power Limited Dee Valley Group Limited Severn Trent Holdings Limited Dee Valley Limited Severn Trent LCP Limited Dee Valley Services Limited Severn Trent Leasing Limited Dee Valley Water (Holdings) Limited Severn Trent Metering Services Limited East Worcester Water Limited Severn Trent MIS Trustees Limited Etwall Land Limited Severn Trent Overseas Holdings Limited Gunthorpe Fields Limited Severn Trent Pension Scheme Trustees Limited Hafren Dyfrdwy Cyfyngedig Severn Trent PIF Trustees Limited Midlands Land Portfolio Limited Severn Trent Power Generation Limited North Wales Gas Limited Severn Trent Property Solutions Limited Northern Gas Supplies Limited Severn Trent Reservoirs Limited Severn Trent Corporate Holdings Limited Severn Trent Services Defence Limited Severn Trent Data Portal Limited Severn Trent Services (Water and Sewerage) Limited Severn Trent Draycote Limited Severn Trent Services Defence Holdings Limited Severn Trent Finance Holdings Limited Severn Trent Services Holdings Limited Severn Trent Finance Limited Severn Trent Services International (Overseas Holdings) Limited Severn Trent Financing and Investments Limited Severn Trent Services International Limited Severn Trent General Partnership Limited Severn Trent Services Operations UK Limited Severn Trent Green Power (Ardley) Limited Severn Trent Services Purification Limited Severn Trent Green Power (Bridgend) Limited Severn Trent Services UK Limited Severn Trent Green Power (Cassington) Limited Severn Trent SSPS Trustees Limited Severn Trent Green Power (CW) Limited Severn Trent Systems Limited Severn Trent Green Power (Hertfordshire) Limited Severn Trent Trimpley Limited Severn Trent Green Power (North London) Limited Severn Trent Utilities Finance Plc Severn Trent Green Power (RBWM) Limited Severn Trent Utility Services Limited Severn Trent Green Power (Wallingford) Limited Severn Trent Water Limited Severn Trent Green Power (West London) Limited Severn Trent Wind Power Limited Severn Trent Green Power Biogas Limited Wrexham Water Limited Severn Trent (W&S) Limited Severn Trent Retail and Utility Services Limited

Country of operation Percentage of Class of share All subsidiary undertakings and incorporation share capital held capital held Derwent Insurance Limited Gibraltar 100% Ordinary Energy Supplies UK Limited United Kingdom 100% A and B Ordinary Lyra Insurance Guernsey Limited Guernsey 100% Ordinary Severn Trent Africa (Pty) Ltd South Africa 100% Ordinary Severn Trent Carsington Limited United Kingdom 100% A and B Ordinary Severn Trent Response Limited Ireland 60% Ordinary

Severn Trent Plc Annual Report and Accounts 2019 193 Group financial statements

Notes to Group financial statements continued For the year ended 31 March 2019

46. Subsidiary undertakings continued Unless stated below, the registered office of the aforementioned entities is Severn Trent Centre, 2 St John’s Street, Coventry, CV1 2LZ, United Kingdom. Company Registered office Dee Valley Limited Packsaddle, Wrexham Road, Rhostyllen, Wrexham, LL14 4EH Derwent Insurance Limited 6A Queensway, PO Box 64, Gibraltar Hafren Dyfrdwy Cyfyngedig Packsaddle, Wrexham Road, Rhostyllen, Wrexham, LL14 4EH Lyra Insurance Guernsey Limited St Martin's House, Le Bordage, St Peter Port, GY1 4AU, Guernsey Severn Trent Africa (Pty) Ltd 2 Elgin Road, Sunninghill, Johannesburg, South Africa Severn Trent General Partnership Limited 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ Severn Trent Green Power (Ardley) Limited The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB Severn Trent Green Power (Bridgend) Limited The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB Severn Trent Green Power (Cassington) Limited The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB Severn Trent Green Power (CW) Limited The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB Severn Trent Green Power (Hertfordshire) Limited The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB Severn Trent Green Power (North London) Limited The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB Severn Trent Green Power (RBWM) Limited The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB Severn Trent Green Power (Wallingford) Limited The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB Severn Trent Green Power (West London) Limited The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB Severn Trent Green Power Biogas Limited The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB Severn Trent Green Power Composting Limited The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB Severn Trent Green Power Group Limited The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB Severn Trent Green Power Holdings Limited The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB Severn Trent Response Limited 6th Floor, 2 Grand Canal Square, Dublin 2, Ireland

Subsidiary audit exemptions Severn Trent Plc has issued guarantees over the liabilities of the following companies at 31 March 2019 under section 479C of Companies Act 2006 and these entities are exempt from the requirements of the Act relating to the audit of individual accounts by virtue of section 479A of the Act. Company Company Number Charles Haswell and Partners Limited 2416605 Chester Water Limited 2888872 Dee Valley Group Limited 4316684 Dee Valley Limited 2902525 Dee Valley Water (Holdings) Limited 4421854 East Worcester Water Limited 2757948 Etwall Land Limited 7559793 Gunthorpe Fields Limited 4240764 Severn Trent (W&S) Limited 3995023 Severn Trent Carsington Limited 7570384 Severn Trent Corporate Holdings Limited 4395566 Severn Trent Data Portal Limited 8181048 Severn Trent Draycote Limited 7681784 Severn Trent Finance Holdings Limited 6044159 Severn Trent Finance Limited 6294618 Severn Trent Financing and Investments Limited 6312635 Severn Trent General Partnership Limited SC416614 Severn Trent Holdings Limited 5656363 Severn Trent Investment Holdings Limited 7560050 Severn Trent LCP Limited 7943556 Severn Trent Leasing Limited 6810163 Severn Trent Metering Services Limited 2569703 Severn Trent Overseas Holdings Limited 2455508 Severn Trent Power Generation Limited 2651131 Severn Trent Reservoirs Limited 3115315 Severn Trent Retail and Utility Services Limited 2562471 Severn Trent Services Holdings Limited 4395572 Severn Trent Services International Limited 2387816 Severn Trent Services International (Overseas Holdings) Limited 3125131 Severn Trent Services Purification Limited 2409826 Severn Trent Services UK Limited 8120387 Severn Trent Systems Limited 2394552 Severn Trent Trimpley Limited 10690056 Severn Trent Utility Services Limited 4125386

194 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance Group financial statements > Company financial statements Company statement of comprehensive income Other information For the year ended 31 March 2019

2019 2018 £m £m Profit for the year 216.5 182.4 Other comprehensive income/(loss) Items that will not be reclassified to the income statement: Net actuarial losses (0.1) (9.1) Tax on net actuarial losses – 1.5 Other comprehensive loss for the year (0.1) (7.6) Total comprehensive income for the year 216.4 174.8

Severn Trent Plc Annual Report and Accounts 2019 195 Company financial statements

Company statement of changes in equity For the year ended 31 March 2019

Share Share Other Retained capital premium reserves earnings Total £m £m £m £m £m At 1 April 2017 234.7 112.5 160.7 2,973.7 3,481.6 Profit for the year – – – 182.4 182.4 Net actuarial losses – – – (9.1) (9.1) Tax on net actuarial losses – – – 1.5 1.5 Total comprehensive income for the year – – – 174.8 174.8 Share options and LTIPs – proceeds from shares issued 0.4 5.2 – – 5.6 – value of employees’ services – – – 6.9 6.9 Dividends paid – – – (197.0) (197.0) At 31 March 2018 235.1 117.7 160.7 2,958.4 3,471.9 Profit for the year – – – 216.5 216.5 Net actuarial losses – – – (0.1) (0.1) Tax on net actuarial losses – – – – – Total comprehensive income for the year – – – 216.4 216.4 Share options and LTIPs – proceeds from shares issued 0.8 10.3 – – 11.1 – value of employees’ services – – – 7.2 7.2 Dividends paid – – – (211.9) (211.9) At 31 March 2019 235.9 128.0 160.7 2,970.1 3,494.7

Included in retained earnings are profits of £1,221.2 million that arose from Group restructuring arrangements in previous years and are therefore not distributable.

196 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance Group financial statements > Company financial statements Company balance sheet Other information For the year ended 31 March 2019

2019 2018 Note £m £m Non-current assets Intangible fixed assets 2 0.1 0.2 Tangible fixed assets 3 0.5 0.2 Investments in subsidiaries 4 3,337.9 3,330.0 Deferred tax asset 5 1.6 1.5 Trade and other receivables 6 659.8 527.6 3,999.9 3,859.5 Current assets Trade and other receivables 6 23.8 44.3 Current tax receivable 25.2 15.9 Cash and cash equivalents 1.9 – 50.9 60.2 Current liabilities Borrowings 7 (4.5) (17.2) Trade and other payables 8 (147.1) (137.0) Provisions 9 (3.6) (6.0) (155.2) (160.2) Net current liabilities (104.3) (100.0) Total assets less current liabilities 3,895.6 3,759.5 Non-current liabilities Borrowings 7 (88.3) (85.4) Trade and other payables 8 (298.9) (189.0) Retirement benefit obligations (8.6) (8.7) Provisions 9 (5.1) (4.5) (400.9) (287.6) Net assets 3,494.7 3,471.9 Capital and reserves Called up share capital 10 235.9 235.1 Share premium account 11 128.0 117.7 Other reserves 12 160.7 160.7 Retained earnings 2,970.1 2,958.4 Total capital and reserves 3,494.7 3,471.9

The profit for the year is £216.5 million (2018: £182.4 million). Signed on behalf of the Board who approved the accounts on 20 May 2019.

Andrew Duff James Bowling Chairman Chief Financial Officer

Company number: 02366619

Severn Trent Plc Annual Report and Accounts 2019 197 Company financial statements

Notes to Company financial statements For the year ended 31 March 2019

1. Employee numbers The average number of employees during the year was 11 (2018: 9). 2. Intangible fixed assets Purchased software £m Cost At 1 April 2018 1.1 Disposals (0.9) As at 31 March 2019 0.2 Amortisation At 1 April 2018 (0.9) Amortisation for the year – Disposals 0.8 At 31 March 2019 (0.1) Net book value At 31 March 2019 0.1 At 31 March 2018 0.2

3. Tangible fixed assets Land and Office fixtures Assets under buildings and equipment construction Total £m £m £m £m Cost At 1 April 2018 0.1 0.6 – 0.7 Additions – – 0.5 0.5 Disposals (0.1) (0.6) – (0.7) As at 31 March 2019 – – 0.5 0.5 Depreciation At 1 April 2018 – (0.5) – (0.5) Disposals – 0.5 – 0.5 At 31 March 2019 – – – – Net book value At 31 March 2019 – – 0.5 0.5 At 31 March 2018 0.1 0.1 – 0.2

4. Investments in subsidiaries £m As at 1 April 2018 3,330.0 Additions 8.1 Impairment (0.2) As at 31 March 2019 3,337.9

Details of principal subsidiaries of the Company are given in note 46 to the Group financial statements.

198 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance Group financial statements > Company financial statements Other information

5. Deferred tax asset Accelerated Retirement Fair value tax benefit of financial depreciation obligations instruments Other Total £m £m £m £m £m At 1 April 2017 0.1 – 0.1 (0.1) 0.1 (Charge)/credit to income (0.1) – (0.1) 0.1 (0.1) Credit to equity – 1.5 – – 1.5 At 1 April 2018 – 1.5 – – 1.5 Credit to income 0.1 – – – 0.1 At 31 March 2019 0.1 1.5 – – 1.6

6. Trade and other receivables 2019 2018 £m £m Current assets Other amounts receivable 6.5 4.4 Prepayments 0.4 0.5 Amounts owed by group undertakings 16.9 39.4 23.8 44.3 Non-current assets Other amounts receivable – 1.6 Loan receivable 32.4 26.4 Amounts owed by group undertakings under loan agreements 627.4 499.6 659.8 527.6 683.6 571.9

7. Borrowings 2019 2018 £m £m Current liabilities Bank overdraft 4.5 17.2 Non-current liabilities Other loans 88.3 85.4 92.8 102.6

Non-current borrowings comprise the Company’s RPI linked retail bond issued in July 2012. The bond carries a coupon of 1.3% on the principal amount which is uplifted by RPI. The bond is repayable in July 2022. At the balance sheet date the Company had £100 million (2018: £100 million) of undrawn borrowing facilities. 8. Trade and other payables 2019 2018 £m £m Current liabilities Trade payables 0.3 0.5 Social security and other taxes 0.1 0.5 Other payables 4.0 2.8 Accruals 3.4 4.0 Amounts due to group undertakings 139.3 129.2 147.1 137.0 Non-current liabilities Amounts due to group undertakings 298.9 189.0 446.0 326.0

Severn Trent Plc Annual Report and Accounts 2019 199 Company financial statements

Notes to Company financial statements continued For the year ended 31 March 2019

9. Provisions Insurance Other Total £m £m £m At 1 April 2018 5.6 4.9 10.5 Charged to income statement – 0.1 0.1 Utilisation of provision (0.6) (1.3) (1.9) At 31 March 2019 5.0 3.7 8.7

2019 2018 £m £m Included in: Current liabilities 3.6 6.0 Non-current liabilities 5.1 4.5 8.7 10.5

The claim outflows associated with insurance provisions are estimated to arise over a period of up to five years from the balance sheet date. Other provisions include provisions for dilapidations and commercial disputes. The associated outflows are estimated to arise over a period up to five years from the balance sheet date. 10. Share capital 2019 2018 £m £m Total issued and fully paid share capital 17 240,943,929 ordinary shares of 97 /19p (2018: 240,222,617) 235.9 235.1

11. Share premium 2019 2018 £m £m At 1 April 117.7 112.5 Share premium arising on issue of shares for Employee Sharesave Scheme 10.3 5.2 At 31 March 128.0 117.7

12. Other reserves Capital redemption Hedging reserve reserve Total £m £m £m At 1 April 2017, 31 March 2018 and 2019 157.1 3.6 160.7

The capital redemption reserve arose on the redemption of B shares. The hedging reserve arises from gains or losses on interest rate swaps taken directly to equity under the hedge accounting provisions of IFRS 9 and the transition rules of IFRS 1. 13. Share based payment For details of employee share schemes and options granted over the shares of the Company, see note 37 of the Group financial statements. Details of options exercised and awards vesting during the year and of the weighted average share price of the Company during the year are also disclosed in that note.

200 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance Group financial statements > Company financial statements Other information

14. Pensions

Defined benefit schemes The Group operates defined benefit pension schemes, of which some employees of the Company are members. There is no contractual agreement for charging the net defined benefit cost of these schemes between the companies that participate in the schemes. As a result, the net defined benefit cost of the scheme is recognised in the financial statements of the sponsoring employer, Severn Trent Water Limited. The scheme closed to future accrual on 31 March 2015. The cost of contributions to the Group schemes amount to £0.4 million (2018: £0.6 million). There were no amounts outstanding for contributions to the defined benefit schemes (2018: nil). The Company has an obligation to pay pensions to a number of former employees, whose benefits would otherwise have been restricted by the Finance Act 1989 earnings cap. This unfunded scheme is part of the Severn Trent Pension Scheme. Information about the schemes as a whole is disclosed in note 28 to the Group financial statements. 15. Related party transactions The retirement benefit schemes operated by the Group are considered to be related parties. Details of transactions and balances with the retirement benefit schemes are disclosed in note 28. The Company has given guarantees in favour of Water Plus Limited in respect of the joint venture’s liabilities to wholesalers in the Open Water market and its loan from Severn Trent Water Limited. The guarantee in respect of liabilities to wholesalers is capped at £58.1 million (2018: £42.5 million) and the guarantees for the Severn Trent Water loan is for the amount due. 16. Contingent liabilities a) Bonds and guarantees The Company has entered into bonds and guarantees in the normal course of business. No liabilities are expected to arise in respect of either the bonds or guarantees. b) Bank offset arrangements The banking arrangements of the Company operate on a pooled basis with certain of its subsidiary undertakings. Under these arrangements participating companies guarantee each others’ overdrawn balances to the extent of their credit balances, which can be offset against balances of participating companies. As at 31 March 2019, the Company had no contingent liabilities (2018: nil). 17. Post balance sheet events Following the year end the Board of Directors has proposed a final dividend of 56.02 pence per share. 18. Dividends For details of the dividends paid in the years ended 31 March 2019 and 31 March 2018 see note 14 in the Group financial statements.

Severn Trent Plc Annual Report and Accounts 2019 201 Other information

Five year summary

2019 2018 2017 2016 2015 (restated)¹ Continuing operations £m £m £m £m £m Turnover 1,767.4 1,696.4 1,638.0 1,753.7 1,801.3 Profit before interest, tax and exceptional items 573.6 539.8 520.1 503.4 540.3 Net exceptional items before tax (9.6) (12.6) 16.6 1.0 (18.7) Amortisation of acquired intangible assets (0.7) – – – – Net interest payable before gains/(losses) on financial instruments and exceptional finance costs (194.2) (219.5) (205.1) (209.3) (240.0) Gains/(losses) on financial instruments 16.0 (6.7) (1.8) 7.7 (133.5) Results of associates and joint ventures (0.4) 0.2 (1.8) 0.1 0.1 Profit on ordinary activities before taxation 384.7 301.2 328.0 302.9 148.2 Current tax on profit on ordinary activities (31.8) (32.9) (36.3) (51.3) (37.8) Deferred tax (37.6) (28.7) (22.4) (13.7) 5.1 Exceptional tax – – 52.2 78.6 – Profit on ordinary activities after taxation 315.3 239.6 321.5 316.5 115.5 Results from discontinued operations – 13.2 21.1 14.8 4.7 Profit for the year 315.3 252.8 342.6 331.3 120.2 Net assets employed Fixed assets 9,337.7 8,660.1 8,315.7 7,810.8 7,620.0 Other net liabilities excluding net debt, retirement benefit obligation, provisions and deferred tax (992.6) (956.0) (916.8) (798.4) (799.0) Derivative financial instruments² (95.1) (104.3) (161.1) (166.3) (177.7) Net retirement benefit obligation (452.9) (519.8) (574.6) (309.5) (468.9) Provisions for liabilities and deferred tax (798.9) (726.5) (657.5) (694.7) (725.4) Net assets held for sale – – – – 72.6 6,998.2 6,353.5 6,005.7 5,841.9 5,521.6 Financed by Called up share capital 235.9 235.1 234.7 234.3 233.7 Reserves 928.2 761.8 688.6 783.1 521.9 Total shareholders’ funds 1,164.1 996.9 923.3 1,017.4 755.6 Non-controlling interests – – – 1.1 13.4 Net debt³ 5,834.1 5,356.6 5,082.4 4,823.4 4,752.6 6,998.2 6,353.5 6,005.7 5,841.9 5,521.6 Statistics Earnings per share (continuing) – pence 133.4 101.8 136.8 133.5 48.3 Underlying earnings per share – pence 145.8 120.5 115.7 102.1 107.2 Dividends per share (excluding special dividend) – pence 93.4 86.6 81.5 80.7 84.9 Dividend cover (before exceptional items and deferred tax) 1.6 1.4 1.4 1.3 1.3 Gearing4 – % 83.3 84.4 84.6 82.6 86.1 Ordinary share price at 31 March – pence 1,976.0 1,844.0 2,382.0 2,173.0 2,059.0 Average number of employees – Regulated Water and Waste Water 5,680 5,660 5,273 5,236 5,532 – Other 900 605 596 2,122 1,910

1 Restated as set out in note 2 to the Group financial statements. 2 Excludes instruments hedging foreign currency debt. 3 Includes instruments hedging foreign currency debt. 4 Gearing has been calculated as net debt divided by the sum of equity and net debt.

202 Severn Trent Plc Annual Report and Accounts 2019 Strategic report Governance Group financial statements Company financial statements Information for shareholders > Other information

Severn Trent shareholder helpline Electronic communications The Company’s registrar is Equiniti. Equiniti’s main By registering to receive shareholder documentation from responsibilities include maintaining the shareholder register Severn Trent Plc electronically shareholders can benefit from and making dividend payments. being able to: If you have any queries relating to your Severn Trent Plc • view the Annual Report and Accounts on the day it shareholding you should contact Equiniti. is published; Registrar contact details: • receive an email alert when shareholder documents are available; Online: www.shareview.co.uk from here you will be able to securely email Equiniti with your query. • cast their AGM vote electronically; and Telephone: 0371 384 2967* • manage their shareholding quickly and securely online, through Shareview. Overseas enquiries: +44 121 415 7044 Electronic shareholder communications also enable the Text phone: 0371 384 2255* Company to reduce its impact on the environment and By post: Equiniti, Aspect House, Spencer Road, Lancing, benefit from savings associated with reduced printing and West Sussex, BN99 6DA mailing costs. Corporate website For further information and to register for electronic shareholder communications visit www.shareview.co.uk Shareholders are encouraged to visit our website www.severntrent.com which provides: Dividend payments

• company news and information; Bank mandates • links to our operational businesses’ websites; Dividends can be paid automatically into your bank or building society account. • details of our governance arrangements; The benefits of doing this are that you will: • details of our strategy; • receive cleared funds in your bank account on the • details of the Group’s business models and business payment date; plan; and • avoid postal delays; and • the Company’s approach to operating responsibly. • remove the risk of your cheques getting lost in the post. There is also a dedicated investors’ section on the website which contains up-to-date information for To take advantage of this service or for further details contact shareholders including: Equiniti or visit www.shareview.co.uk • comprehensive share price information; Dividend reinvestment plan (‘DRIP’) • financial results; The DRIP gives shareholders the option of using their dividend payments to buy more Severn Trent Plc shares instead of • a history of dividend payment dates and amounts; and receiving cash. If you would like to participate in the DRIP, • access to current and historical shareholder documents such please request a dividend reinvestment plan mandate from as the Annual Report and Accounts. Equiniti Financial Services Limited. Telephone: 0371 384 2268* Telephone number from outside the UK: +44 121 415 7173 * Lines are open 8:30am to 5:30pm Monday to Friday (excluding public holidays in England and Wales).

Severn Trent Plc Annual Report and Accounts 2019 203 Other information

Information for shareholders Continued

Buying and selling shares in the UK • Think about getting independent financial and professional advice before you hand over any money. If you wish to buy or sell certificated Severn Trent Plc shares, you may need to use a stockbroker or high street bank which • Remember, if it sounds too good to be true, it probably is. trades on the London Stock Exchange. There are also many If you are approached by fraudsters please tell the FCA using telephone and online services available to you. the share fraud reporting form at www.fca.org.uk/scams, If you are selling, you will need to present your share certificate where you can find out more about investment scams. at the time of sale. Details of low-cost dealing services can be You can also call the Freephone FCA Consumer helpline on obtained from www.shareview.co.uk or 0345 603 7037**. 0800 111 6768. Share price information If you have already paid money to share fraudsters you should contact Action Fraud on 0300 123 2040. Shareholders can find share price information on our website and in most national newspapers. For a real-time buying or Unsolicited mail selling price, you should contact a stockbroker. The Company is legally obliged to make its share register Shareholder security available to the general public. Consequently some Fraudsters use persuasive and high pressure tactics to lure shareholders may receive unsolicited mail. If you wish to limit investors into scams. They may offer to sell shares that turn the amount of unsolicited mail you receive please contact: out to be worthless or non-existent, or to buy shares at an The Mailing Preference Service (‘MPS’), Freepost 29 LON20771, inflated price in return for an upfront payment. While high London, W1E 0ZT. profits are promised, if you buy or sell shares in this way you will probably lose your money. Alternatively, register online at www.mpsonline.org.uk or call the MPS Registration line on 0345 0700 705. How to avoid share fraud: • Keep in mind that firms authorised by the Financial Conduct American Depositary Receipts Authority (‘FCA’) are unlikely to contact you out of the blue Severn Trent has a sponsored Level 1 American Depositary with an offer to buy or sell shares. Receipt (‘ADR’) programme, for which The Bank of New York • Do not get into a conversation, note the name of the person Mellon acts as Depositary. and firm contacting you and then end the call. The Level 1 ADR programme trades on OTCQX which is the • Check the Financial Services Register at www.fca.org.uk to premier tier of the US over the counter (‘OTC’) market under see if the person and firm contacting you is authorised by the symbol STRNY (it is not listed on a US stock exchange). the FCA. Each ADR represents one Severn Trent Ordinary Share. • Beware of fraudsters claiming to be from an authorised firm, If you have any enquiries regarding Severn Trent ADRs please copying its website or giving you false contact details. contact The Bank of New York Mellon. • Use the firm’s contact details listed on the Register if you By post: BNY Mellon Shareowners Services, PO Box 30170, want to call it back. College Station, TX 77842-3170, US. • Call the Freephone FCA Consumer helpline on 0800 111 6768 By telephone: if the firm does not have contact details on the Register or If calling from within the US: (888) 269 2377 (toll-free). you are told they are out of date. If calling from outside the US: +1 201 680 6825. • Search the list of unauthorised firms to avoid at By email: [email protected] www.fca.org.uk/scams Website: www.mybnymdr.com • Consider that if you buy or sell shares from an unauthorised firm you will not have access to the Financial Ombudsman ** Lines are open 8:00am to 4:30pm Monday to Friday for dealing, and until 6:00pm for enquiries. Service or Financial Services Compensation Scheme.

Financial calendar

Ex dividend date – final dividend 13 June 2019 Record date to be eligible for the final dividend 14 June 2019 AGM 17 July 2019 Interim management statement – Q1 year ending 31 March 2020 17 July 2019 Final dividend payment date 19 July 2019 Interim results announcement – year ending 31 March 2020 21 November 2019 Ex dividend date – interim dividend 28 November 2019 Record date to be eligible for the interim dividend 29 November 2019 Interim dividend payment date 3 January 2020

All dates are indicative and are subject to change.

204 Severn Trent Plc Annual Report and Accounts 2019 Design and production by Radley Yeldar www.ry.com This report has been printed on Galerie Satin, a paper which is certified by the Forest Stewardship Council®. The paper is made at a mill with ISO 14001 Environmental Management System accreditation. Printed by CPI Colour using vegetable oil based inks, CPI is a CarbonNeutral® printer, certified to ISO 14001 Environmental Management System and registered to EMAS, the Eco Management and Audit Scheme. Severn Trent Plc Registered office: Severn Trent Centre 2 St John’s Street Coventry CV1 2LZ Tel: 02477 715000 www.severntrent.com Registered in England and Wales Registration number: 2366619